U.S. GOVERNMENT PRINTING OFFICE

58–504CC WASHINGTON : 1999

MEDICARE+CHOICE: AN EVALUATION OF THE

PROGRAM

HEARING

BEFORE THE

SUBCOMMITTEE ON

HEALTH AND ENVIRONMENT

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

AUGUST 4, 1999

Serial No. 106–52

Printed for the use of the Committee on Commerce

(

COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

THOMAS C. SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON HEALTH AND ENVIRONMENT

MICHAEL BILIRAKIS, Florida, Chairman

FRED UPTON, Michigan

CLIFF STEARNS, Florida

JAMES C. GREENWOOD, Pennsylvania

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

Vice Chairman

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

ED BRYANT, Tennessee

TOM BLILEY, Virginia,

(Ex Officio)

SHERROD BROWN, Ohio

HENRY A. WAXMAN, California

FRANK PALLONE, Jr., New Jersey

PETER DEUTSCH, Florida

BART STUPAK, Michigan

GENE GREEN, Texas

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

LOIS CAPPS, California

RALPH M. HALL, Texas

EDOLPHUS TOWNS, New York

ANNA G. ESHOO, California

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

2

C O N T E N T S

Page

Testimony of:

Berenson, Robert A., Director, Center for Health Plans and Providers,

Health Care Financing Administration ...................................................... 15

Canja, Esther, President-Elect, American Association of Retired Persons .. 62

Ignagni, Karen, President and Chief Executive Officer, American Association of Health Plans ...................................................................................... 48

Malavsky, Rabbi Morton .................................................................................. 72

Moon, Marilyn, Senior Fellow, The Urban Institute ..................................... 67

Powell, John, Vice President of Government Relations, The Seniors Coalition ................................................................................................................. 59

Material submitted for the record by:

Berenson, Robert A., Director, Center for Health Plans and Providers,

Health Care Financing Administration, responses for the record ............ 135

Margulis, Heidi, Vice President, Government Affairs, Humana, Inc., letter

dated August 2, 1999, to Hon. Michael Bilirakis, enclosing material

for the record ................................................................................................. 133

(III)

(1)

MEDICARE+CHOICE: AN EVALUATION OF THE

PROGRAM

WEDNESDAY, AUGUST 4, 1999

HOUSE OF REPRESENTATIVES, COMMITTEE ON COMMERCE, SUBCOMMITTEE ON HEALTH AND ENVIRONMENT, Washington, DC.

The subcommittee met, pursuant to notice, at 10:10 a.m. in room

2322, Rayburn House Office Building, Hon. Michael Bilirakis

(chairman) presiding.

Members present: Representatives Bilirakis, Stearns, Greenwood, Burr, Ganske, Bryant, Brown, Pallone, Deutsch, Green, Barrett, Capps, Hall, and Eshoo.

Staff present: Tom Giles, majority counsel; Jason Lee, majority

counsel; Bridgett Taylor, professional staff; Amy Droskoski, professional staff; and Robert Simison, legislative clerk.

Mr. BILIRAKIS. The hearing will come to order.

In February, this subcommittee focused on efforts by the Health

Care Financing Administration to implement a risk adjustment

model for the Medicare+Choice program. Today we will reexamine

the impact of HCFA’s planned risk adjustor and its effect on the

continued viability of this important program.

Two years ago Congress established the Medicare+Choice program as part of the 1997 Balanced Budget Act. The legislation was

enacted with strong bipartisan support to increase the health care

options available to America’s senior citizens.

Today, about 17 percent of Medicare beneficiaries participate in

a Medicare+Choice plan. Many of these plans provide benefits such

as prescription drug coverage, which are not available through traditional fee-for-service Medicare.

Since our last hearing, the July 1st deadline has passed for plans

to inform HCFA of their intent to alter or terminate their contracts. Nearly 100 plans have decided to withdraw from the

Medicare+Choice program, reduce those service areas, or scale back

their benefit packages. Many of these plans cited cuts in funding

proposed by HCFA as a major factor in their decisions.

As a result, 327,000 beneficiaries will lose their current health

coverage next year. For 79,000 of these beneficiaries, no other

Medicare managed care plan will be available in their area. In

Florida, alone, 29,000 beneficiaries will be affected by plan withdrawals, and 10,000 will have no alternative but to return to feefor-service Medicare.

The 1997 Balanced Budget Act required HCFA to establish a

process for adjusting Medicare+Choice payments based on the likeVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00004 Fmt 6633 Sfmt 6633 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
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lihood or risk that enrollees will use health care services. The risk

adjustment process was intended to distribute funds based on the

health status of Medicare+Choice enrollees. Neither Congress nor

the Congressional Budget Office assumed that implementation of

the risk adjustor would result in funding cuts. It was intended to

redistribute moneys based on the health status of beneficiaries,

without reducing overall funding for the program.

Unfortunately, HCFA has proposed a risk adjustment model that

would impose deep spending cuts in the Medicare+Choice program.

Estimates indicate over $11 billion may be drained from the program under HCFA’s proposed risk adjustor, and I believe that estimate came from HCFA. We’ll get into that.

In response, my colleague, Peter Deutsch of Florida, joined me in

introducing H.R. 2419, the Medicare+Choice Risk Adjustment

Amendments of 1999. Our bill will ensure that the risk adjustor is

implemented on a budget-neutral basis, consistent with Congressional intent.

I am deeply concerned about the impact of any instability in the

Medicare+Choice program and our most vulnerable seniors. Choosing a health care plan can be a difficult task for all of us, and it

is particularly hard for the frail elderly. They deserve the health

care options we promised them when we created the

Medicare+Choice program.

If HCFA is allowed to go forward with its ill-advised proposal,

Medicare beneficiaries will face devastating consequences, particularly low-income seniors.

In addition to increased costs and reductions in benefits, many

beneficiaries will lose the option of participating in a Medicare

managed care plan altogether.

For many seniors, Medicare+Choice is an important source of

prescription drug coverage. Clearly, we must preserve this option

for beneficiaries who choose to participate in a Medicare managed

care plan. However, we must do more to increase access to prescription drugs for seniors who need them.

No senior should be forced to choose between buying groceries

and filling a prescription. A nation is judged by how it treats its

most vulnerable citizens, and we must help our neediest seniors obtain prescription drugs.

Over the past several months, I have been working to develop a

plan that meets this objective, and specifically this proposal would

assist States in establishing and expanding programs to help lowincome beneficiaries obtain prescription drugs, preserve seniors’

health options, including prescription drug coverage available

through the Medicare+Choice program, and create incentives for

plans to expand prescription drug coverage at no additional premium for seniors, and establish a Federal stop loss program to protect beneficiaries who have high annual prescription drug costs.

By contrast, the President’s plan is overly broad and spreads resources too thin. As a result, it provides only a limited benefit to

individuals. By targeting assistance to beneficiaries who are low income or have high drug costs, we can more effectively, I think, help

seniors in need.

Furthermore, the President’s plan would not even take effect

until 2002 and it would not be fully implemented until 2008 beVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
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cause of the time needed to create the new bureaucracy of a Medicare Part B. It would do nothing for the poorest and sickest seniors

who need help right now. And even after it is fully implemented

in 2008, the plan will force seniors who have high annual drug

costs to fend for themselves.

I was proud to serve with the National Bipartisan Medicare

Commission, and I remain committed to enacting comprehensive

reforms to protect the program for the future. I believe we can help

the neediest seniors while preserving and strengthening Medicare

for current beneficiaries and future generations. We can accomplish

both goals without increasing—and I emphasize without increasing—beneficiaries’ premiums or jeopardizing the fiscal stability of

Medicare.

I look forward to working with my colleagues on both sides of the

aisle to further refine this plan. I hope it can serve as a vehicle for

a bipartisan effort to help seniors obtain the prescription drugs

they need.

I want to thank all of our witnesses, certainly particularly Dr.

Berenson and all of the others for joining us today to discuss the

important role of Medicare+Choice program in providing health

care options for seniors.

I now yield to the ranking member from Ohio, Mr. Brown.

Mr. BROWN. I thank you, Mr. Chairman.

I’d especially like to thank Dr. Berenson and Marilyn Moon and

Karen Ignagni and other distinguished witnesses for joining us.

As many of you know, I am not a strong proponent of the plusChoice program. I think, in fact, we made a mistake when we

passed the program as part of the Balanced Budget Act. The plusChoice program segments the Medicare risk pool.

Traditional Medicare program provides equal access to benefits

for every senior. Plus-Choice introduces different levels of benefits

into the program—benefits such as prescription drug coverage that

all seniors need but only some seniors get.

The plus-Choice program diverts money toward profits that otherwise could be invested in improved benefits for every senior, and

it generates a huge amount of uncertainty for seniors.

Can they depend on their health plan to stick with them? No.

Can they depend on promised benefits? No. Can they depend on

consistent coverage decisions? No.

That volatility is why we are here today. There are 13,031 seniors in Ohio, alone, in my State, that will be dropped by their

health plans effective January 1, 2000. I’ve heard from several seniors who are going through this for the second time.

When traditional Medicare is being demonized because it costs a

lot to provide health care coverage, it doesn’t have the luxury of

blaming it on big government. It can’t reduce cost. It can’t make

a statement by dropping Medicare beneficiaries or wiping out

promised benefits.

It would be easier and cheaper if the Medicare program could

take those steps, but it wouldn’t be the right thing to do. The public wouldn’t stand for it, nor should they. That’s the nature of a

public program.

But being locked into less-profitable markets is anathema to the

private market. The success of plus-Choice relies on the faulty

4

premise that private sector incentives will produce the right

amount of the right health care delivered in a reliable way.

Realistically, what private sector incentives may produce is

cheaper health care. Unfortunately, cheap is not a proxy for right

or reliable, nor does cheap care necessarily lead to lower Federal

cost.

We’re losing money in managed care today, and with a lobby as

strong as the insurance industry, payment rates won’t go anywhere

but up. It is unrealistic to expect private health plans to ignore

profitability, when profitability is being pitted against individual

well-being or the public good. Health plans will try to squeeze as

much money from the Federal Government as they can. That

doesn’t make them evil. It makes them good businessmen and good

businesswomen.

Consistent with profit motives that are not, in themselves, bad

or good—they are inherent in the market—health plans enroll seniors 1 year, promising them all kinds of benefits, and desert them

the next year. They attract seniors by offering supplemental benefits, but when costs exceed projections, benefits are taken away.

Where does that leave the Federal Government? Between a rock

and a hard place. If we don’t pay health plans more, additional seniors will lose prescription drug and other supplemental benefits.

But when a senior joins a health plan based on the premise of supplemental benefits, the term ‘‘supplemental’’ no longer really fits.

Seniors come to depend on these benefits, and it is a true loss when

health plans drop them.

If we do pay health plans more, the money has to come from

somewhere. Dollars that could be devoted to providing prescription

drug coverage for all Medicare beneficiaries would, instead, be

channeled into prescription drug coverage for some Medicare beneficiaries. It is a catch 22, pure and simple.

Finally, giving over Medicare to the insurance industry allows

the Federal Government to pass the buck on the hard health care

decisions. It takes the pressure off us when the pressure should be

on us. Health care costs are increasing, the elderly population is increasing. We need to acknowledge the implications and figure out

what to do next.

There is one potential advantage to promoting private managed

care plans—shifting seniors’ health care coverage to the private

market would stifle the power of multiple special interest groups

to play havoc on Federal Medicare legislation. Unfortunately, all

we would be doing, though, is trading multiple special interest

groups for one big one, the insurance industry.

But, regardless of the broader issues around plus-Choice, the reality is that 6.2 million seniors are enrolled in plus-Choice and we

have to deal with the situation at hand. Congress has a responsibility to pay plus-Choice plans adequately. Plus-Choice plans have

a responsibility to prove that current rates are inadequate.

The American Association of Health Plans says there is a fairness gap between managed care and fee-for-service payments, but,

as far as I know, they have not shared supporting data or the

methodology they used to reach this conclusion.

AAHP is concerned about a fairness gap. I’m concerned about a

data gap. Some health plans are clearly losing money in some

5

counties, but what does this mean? Does it mean that large health

plans like Aetna and Cigna cannot cross-subsidize from more-profitable to less-profitable counties? Show us the cost data. Are plans

being under-paid in every county? Show us the cost data. Do some

health plans underestimate the cost of supplemental benefits?

Show us the cost data. Did Congress underestimate how much it

would cost health plans to cover basic benefits, or did health plans

over-estimate their ability to cut cost? Can we see how they spend

the money that we pay them? Is the problem that we removed

GME funding from managed care rates? Ostensibly, that reduction

would have an impact only in GME spending. It should be a wash.

I don’t think managed care plans are sinister and I do think

that, along with the Medicare program, they’ve led the way in

eliminating unnecessary costs from the practice of medicine, but I

do not think that Congress or taxpayers we represent should be

asked to pay managed care plans more until they provide the answers and the data we need to pay them correctly.

Thank you, Mr. Chairman.

Mr. BILIRAKIS. I thank the gentlemen.

Dr. Ganske, for an opening statement.

Mr. GANSKE. Thank you, Mr. Chairman. I’ll be brief.

I need to tell you, Mr. Chairman, that I won’t be able to stay for

the whole hearing because I have work to do on managed care reform.

Mr. Chairman, I don’t consider HCFA’s risk adjustor to be illconsidered. With all due respect, senior citizens in Florida already

have a richer HMO benefit package than anything we will ever see

in Iowa.

Some people talk about a fairness gap. Well, Mr. Chairman, I

don’t think it is fair that seniors in Florida get prescription drugs

and those in Iowa never will.

We do need risk adjustment.

Let me tell you about a T-shirt that I received about 2 years ago.

It was from a Medicare HMO in one of the southern States, southwest States. It was an inducement for seniors to join a Medicare

HMO and join the Silver Sneaker Club.

The benefit touted was a health fitness club. On the surface, that

may seem like, gee, that’s a neat thing. That would help keep people healthy, right? It also serves as a risk selector, because which

Medicare recipient is going to be interested in joining a health fitness club except somebody who is healthy? So you’ve got a very

subtle inducement there to select out the healthier patient.

We’ve had GAO reports, one after another, pointing out how

HMO Medicare beneficiaries, on the average, cost something like

$0.65, compared to $1 for fee-for-service, until they disenroll, and

at that time they end up costing Medicare fee-for-service $1.65. I

mean, there clearly is a need for risk adjustment, and I applaud

HCFA’s attempts to do this. It’s not easy.

Now, do we need more money? Do we need to do some adjustment for Medicare for the 1997 Balanced Budget Act? You bet we

do. I’ve got rural hospitals that are on the cusp. We’ve got teaching

hospitals around the country that need an adjustment.

And part of my frustration with this entire budgetary process

and the tax cut process has been that, instead of handling these

6

needed expenditures first and then figuring out what you’re going

to have left for a tax cut, we’ve got the cart before the horse. It is

that simple.

Well, Mr. Chairman, if it is going to come down to passing a

large tax cut and then also passing emergency spending for such

emergencies as the census, and then also doing emergency funding

for true emergencies, like the farm crisis that we have, there isn’t

going to be much left over. So maybe, Mr. Chairman, I should

make a suggestion. If we are going to have to go back into the 1997

BBA and do an adjustment for Medicare, maybe we ought to go

back and start looking at some revenues from tobacco. Maybe we

ought to go back and look at the Federal Government recovering

some of the moneys that the tobacco companies have given to the

States and utilize that for Medicare.

Mr. Chairman, this is the Health and Environment Subcommittee. We have jurisdiction over this. Maybe we ought to start

looking at a tobacco tax bill, or maybe we ought to start looking

at recovering some of those tobacco moneys so that we can utilize

them in health care. We have reports from around the country

right now, Mr. Chairman, where those tobacco moneys are being

used by States for non-health-care items. I don’t think that’s right.

I suspect most of the people on this subcommittee would feel the

same way.

But we have a lot to talk about, Mr. Chairman, and I’m glad you

are holding this hearing. I’ll be very interested in the testimony

that we are about to receive.

Thank you.

Mr. BILIRAKIS. I thank the gentleman.

The gentlewoman from California, Ms. Eshoo.

Ms. ESHOO. First, Mr. Chairman, thanks to you for your leadership in holding this hearing today. It is the second this year to

monitor the progress of Medicare+Choice, the program

Medicare+Choice.

I’d like to ask for unanimous consent to submit my formal statement into the record.

Mr. BILIRAKIS. Without objection, the written statement of all

members of the subcommittee will be made a part of the record.

Ms. ESHOO. Thank you.

I look forward to hearing the testimony of those that are here

today to give it. Obviously, there will be conflicting testimony.

From the industry, itself, I suspect they will be saying that there’s

not enough in the program, that the reimbursements are not fair

enough, they’re not high enough, and that’s why they are withdrawing from so many markets, including some parts of my Congressional District, where seniors are absolutely outraged. And we

are going to hear something else from HCFA.

So I’m going to withhold at least some of my judgment until I

hear from them, and thank you again for holding the hearing. It

is an important one.

What I might add is that my colleague, Dr. Ganske, I think really characterized the very large picture in terms of what the Congress is taking on right now, and that is our overall budget and the

tax cuts. I think the cart is really coming before the horse, because

we don’t see, at least in one of the major plans, anything that will

7

address the shortcomings of Medicare, and here we are having

probably one of the most important hearings on the entire Hill,

with discrepancies between what HCFA views and what the private sector views this issue, and yet, in the major republican plan,

there’s not a dime—not a dime. You can reform Medicare as much

as you want, but there isn’t anything that shows that if you don’t

add some more resources that it really is going to work.

So today should be interesting. Thank you, Mr. Chairman, for

holding the hearing again.

[The prepared statement of Hon. Anna G. Eshoo follows:]

PREPARED STATEMENT OF HON. ANNA G. ESHOO, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

Thank you, Mr. Chairman. I’m very happy that we are having this hearing today,

the second this year to monitor the progress of the Medicare+Choice program.

There are few programs that are as critical to our Nation’s senior citizens as

Medicare.

As the primary health care provider for the over-65 population, Medicare is ultimately responsible for the well-being of our parents, our grandparents, and ultimately ourselves.

That is why it is so critical that we, in Congress, do everything in our power to

ensure its long-term solvency.

I am an avid supporter of the President’s plan to dedicate 15% of the budget surplus to Medicare, ensuring its solvency until the year 2020.

When we passed the Balanced Budget Act in 1997, we recognized that the way

we reimburse health plans for Medicare is inefficient and results in a glut of overpayment.

According to GAO, Medicare overpaid health plans $1.3 billion in 1998 alone.

Implementation of the new payment methodology will save the federal government billions of dollars in overpayments by providing us with the necessary information to ensure that reimbursements reflect costs.

More importantly, the new methodology will remove the present incentive on the

part of some plans to focus on enrolling healthier seniors and avoid the sicker, most

needy ones.

While this new system promises to cut the fat out of Medicare, there are some

who say it has gone too far.

Last year, nearly 100 managed care companies pulled out of the Medicare program, or significantly scaled back their services. And they say it is because the reimbursement rates are too low to make a profit.

I question the validity of this argument but, nonetheless, I am concerned that

something needs to be done to prevent further pullouts.

Seniors need quality, reliable health care. They should not be forced to pay for

health insurance today that may not be there for them tomorrow.

So, thank you Mr. Chairman for providing us with this opportunity to take another look at this important program. I look forward to hearing from the witnesses.

Mr. BILIRAKIS. I thank the gentlelady.

Mr. Bryant, an opening statement?

Mr. BRYANT. Thank you, Mr. Chairman.

Today, nearly 40 million Americans rely on Medicare for their

health care, and approximately 6.2 million beneficiaries are enrolled in the Medicare+Choice program. Congress created this new

program with the BBA in 1997 to offer Medicare beneficiaries new

private health plan options—in other words, to give seniors a

choice among plans. Most of these private plans offer the beneficiaries a more generous benefit package with fewer out-of-pocket

expenses.

I am concerned, however, that last year 99 private health plan

Medicare contracts were either terminated or reduced their service

areas. This year, the same number of contracts will either not be

8

renewed or will serve a smaller geographic area. It would appear

that the choices Congress intended to provide are now eroding.

We will hear a statistic today that 95 percent of the current enrollees in Medicare+Choice program will be able to continue with

their current plan in the year 2000. While that statistic may sound

acceptable, I doubt it will give much comfort to the nearly 700

beneficiaries affected by plan withdrawals in my home State of

Tennessee. The majority of these seniors will have no other

Medicare+Choice plan to turn to.

I was contacted recently—my office in Memphis was—by a

woman from that city. She said that she had been very pleased

with her Medicare HMO, which, in her case, happens to be United

Health Care of Tennessee. She said—and I quote—‘‘I have never

felt more secure about my health insurance.’’

She goes on to say that she used to have traditional fee-for-service, Medicare with supplemental insurance with that, but the cost

of this supplemental insurance got so high that she could no longer

afford it.

The Medicare+Choice plan provided her with a choice, and it was

a very attractive choice. However, her plan is terminating its contract this year and there will be zero remaining Medicare+Choice

options for her in Shelby County.

Now, we were contacted by United Health Care, and they gave

us an explanation as to why they were, in effect, pulling out of

these plans, and I’ll read just a part of this letter from United

Health Care dated July of this year.

It says, ‘‘This difficult decision was made following a thorough

analysis of our health plans. Changes brought to health plan reimbursement under the 1997 Balanced Budget Act continue to create

operational challenges. Payments to plans are being held to minimum increases, while medical cost trends are increasing at a

much higher rate. The untested risk adjustor creates uncertainty

regarding future payment adequacy.

‘‘Additionally, there is an increasing inequity between payments

to Medicare health plans and the traditional Medicare program,

which makes it difficult to offer benefits over and above Medicare’s

basic benefit package in a number of markets.

‘‘These program changes also hinder our ability to maintain competitive reimbursement contracts with physicians, hospitals, and

other providers.’’

As has been said earlier this morning, there are those in Congress who really aren’t for this plan, the ability to offer health care

options, and I sometimes wonder if this is not one way that we can

squeeze that out of the market and simply go back to the full feefor-service arrangement with Medicare. I hope that’s not the case,

because I hope we continue to have choices available for our senior

citizens.

For that reason, I think it is important that we on this panel examine the reasons behind all these withdrawals, and I think we

ought to do that today if we can do that. I think it is necessary for

us to consider payment rates, the risk adjustor administrative and

regulatory burdens on the plans, and other possible disincentives

for public health or for private health plans to contract with Medicare and to remain in the program.

9

I also think we should look at how many plans that did not

renew their contracts had to increase premiums or reduce their

benefits. We also need to remember that these decisions affect

Medicare beneficiaries enrolled in the Medicare+Choice program.

To conclude, I look forward to examining these issues this morning and to hearing from our distinguished panel of witnesses. I

want to welcome you all and thank you for taking time to be with

us today.

Mr. Chairman, I thank you and yield back just on time.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Deutsch for an opening statement?

Mr. DEUTSCH. Thank you, Mr. Chairman. Thank you for this

hearing. I think it is very important for our constituents, and really

for the whole country.

Before I begin with a statement, I just want to respond a little

bit to what Congressman Ganske said in his opening statement, because I think it is important to dialog a little, just so that we at

least hear how different people, you know, have really 180-degree

different perspectives on a lot of things to do with Medicare-plus.

I happened to have visited Iowa, and I happen to like Iowa. My

roommate from law school was from Colfax, Iowa. But Iowa is not

south Florida, and, for that matter, not Florida, and I think it is

totally missing the whole point of how the system is set up to honestly think that the reimbursement level in Colfax, Iowa, should be

the same as Miami, Florida. It doesn’t deal with reality and cost,

and cost of living and cost of everything—cost of rent, cost of insurance, cost of literally every factor that was built in.

So I think that premise which drives some of this issue is a bad

premise and a false premise, for that matter, and I think the

other—and, going back to where we are, I think it is really important for us, as we are having this debate, to sort of focus in a little

bit historically of where we were, where we are, and where we are

going to be going if we continue in the direction that we are without changing.

Where we were were some pretty bad old days under Medicare

before this option existed. I mean, I think universally we view our

job as trying to make America and the world a better place, and

universally I think all of us care about our constituents. And if we

look at what Medicare beneficiaries had as benefits prior to this option, it wasn’t as good. I mean, people were suffering in so many

ways in terms of out-of-pocket costs, and Congressman Bryant’s letter from a constituent is multiplied by millions in terms of real people and the benefits that they’ve seen.

Congress ought to be patting ourselves on the back in terms of

what we did in terms of cost savings and adjusting it. Nothing we

do is perfect. It’s a dynamic process. But I guess sort of where we

are going—you know, one of the other premises of my colleagues

which I really think needs to focus on is many of the HMOs—not

all, but majority—are for-profit institutions, which, by definition, is

not a bad thing. I think as a society, as a Congress, we understand

that.

But to say that they are dropping 327,000 people for manipulative reasons or for other reasons, you know, again, I just think toVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
10

tally defies logic. If they could make it work, they wouldn’t be dropping people.

That’s the number of people that have been dropped. We also

have 70,000 people who had that option who literally do not have

that option today.

I think tied into that is—really talking to some of the frustration—and I actually, in terms of my District, have, I guess, the luxury or the—just in my District I both have an urban area, a suburban area in terms of Broward and Dade Counties, but Monroe

County is technically a rural health system. If you think about it,

it is 120 miles long. In terms of hospitals, where are the hospitals?

So technically it is a rural health system. In terms of HMO access,

it’s not much different than rural farm areas in Iowa—much warmer, much more pleasant, much more colorful.

But I will tell you that, you know, one of the things we ought

to be doing and talking about is really how to get service into those

areas. I mean, you know, when my colleagues from rural areas

talk—I have a statement that I’d be happy to submit for the record.

Mr. GANSKE. Mr. Chairman, I’d ask unanimous consent for 1 additional minute.

Mr. BILIRAKIS. Does the gentleman want an additional minute?

Mr DEUTSCH. I’d be happy to an additional minute and yield to

my colleague from the great State of Iowa.

Mr. BILIRAKIS. Well, all right. Let’s not overdo this.

Mr. GANSKE. Iowa is 24th in the country in terms of average

overhead for providing medical services. It is 48th in the country

in terms of reimbursement. And if you look at the average HMO

reimbursement per county in my District and compare it to yours,

you are receiving more than twice the AAPCC than what my constituents are, and because of that your constituents are able to get

a package of benefits that are simply not and never will be available to those in large parts of the country.

And so when we look at how do we fund Medicare HMOs, I think

we need to address that issue and come to at least a closer national

average than a double difference, and we do need to look at the evidence that we’ve seen before this committee on why we need a risk

adjustor.

Mr. DEUTSCH. Just reclaiming my time very quickly——

Mr. BILIRAKIS. Very quickly, if you could.

Mr. DEUTSCH. And I think the chairman and I and other people

from both urban and rural areas have been supportive of trying to

make the system more equitable, but, you know, that’s where we

can get into details. And I think Congress is particularly illequipped in some ways to get at that micro-management level of

HCFA. We can get policy bases in terms of working with them, and

working with them both substantively and administratively to try

to correct some of those changes, as we have—as both you and I

have in terms of our work on this subcommittee and on the committee.

Mr. BILIRAKIS. The gentleman’s time has expired. Of course, I

think we should remind the gentleman from Iowa that he played

a very large part in these exact discussions regarding the adjusting

of the AAPCC and, consequently, there were adjustments made

11

which are very favorable to the rural areas, and much of that was

a result of his efforts.

Ms. Capps for an opening statement?

Ms. CAPPS. Thank you, Mr. Chairman, for holding this hearing.

Medicare is a critically important program for seniors. It has resulted in a measure of security for retirees and the disabled that

was unthinkable in the years before it was enacted.

I am so appreciative that we are having this hearing today to

look at how the latest major change to Medicare, the

Medicare+Choice program, has been working.

For me, someone who represents one of the areas where Medicare HMO pullouts were widespread last year, Medicare+Choice

has been a mixed bag.

I represent all of San Luis Obispo County and nearly all of Santa

Barbara County on California’s central coast. Last year all but two

HMOs pulled out of San Luis Obispo County, and all but one from

the most rural part of that county. The other county, Santa Barbara, was more lucky. None of the HMOs pulled out, but they are

threatening to.

In both counties, the providers have complained of low reimbursement rates from HCFA to the HMOs and from the HMOs to

the providers. In fact, one of the reasons the HMOs pulled out of

northern San Luis Obispo County was because the health care

major provider would no longer accept Medicare HMO patients.

So I have some sympathy with the argument that at least in

some rural areas the reimbursement rates for HMOs need to be

looked at again, and we made that clear, I believe, with the differing testimonies here today.

In my request to HCFA and HHS asking for a review of reimbursement rates for my two counties, I have noted huge disparity

of payments to the adjoining jurisdictions. This disparity is not lost

on the seniors who receive the benefits.

That said, I am very concerned about the GAO study that claims

that Medicare HMOs were paid some $1.3 billion in excess payments in 1998. I find this hard to reconcile with what is happening

in my Congressional District.

The issue about HCFA payments apparently is very complex. It

is too simple to say that too much money or too little money is

going to the plans, but I think there is even a more important lesson we should learn from our experience so far with

Medicare+Choice, and we must apply this lesson as we consider

any changes to the program, and certainly as any major Medicare

reforms are being discussed. That lesson is that Medicare must be

a stable program for our seniors.

The upheavals from the HMO pullouts last year really shook up

thousands of seniors in my District. I don’t want to see this happen

again.

It may not be a big deal if my insurance company decides it

won’t be offering me coverage next year. I’ll pick another plan from

the list and be slightly inconvenienced. But if I am an 84-year-old

senior living on my own, caring for my health is a constant concern, and my HMO dropping me is a life-altering event.

I’m bothered by the cavalier attitude of some who say that these

are just routine shake-outs, that things will settle down soon. In

12

the lives of seniors in my District and across this country, that is

a blatant disregard for their lives. It is not good enough. Seniors in my District felt extreme disruption in their lives of HMO pullouts and they don’t want to go

through this again. Finally, I agree with the written testimony of Dr. Berenson, who

points out that these disruptions actually underscore the importance of the need for a Medicare reform plan, and particularly including prescription drug coverage as a part of Medicare. That is

the reason overwhelmingly that seniors in my District chose the

Medicare+Choice.

So let’s keep this in mind. Medicare today is an incomplete program without drug coverage. Seniors know that and that is why,

as I said, many have chosen Medicare HMOs. So as we consider how Medicare+Choice is doing, or major reforms to the program like switching to a voucher or premium support plan, let’s keep in mind our seniors’ need for a stability in the

programs that we choose. Thank you. I’ll yield back the balance of my time.

Mr. BILIRAKIS. I thank the gentlelady. Mr. Pallone for an opening statement?

Mr. PALLONE. Thank you, Mr. Chairman. Again, I want to thank

you, also, for holding this hearing. It is very important that this subcommittee continue to monitor

the implementation of the Medicare+Choice program. Although the

vast majority of Medicare beneficiaries still receive their care

through the traditional fee-for-service option, more and more Medicare beneficiaries are turning to managed care for their health

needs and Congress must make sure this program functions as it

was intended to function.

I wanted to say, despite the highly publicized decision of 99

HMOs to pull out of their markets or reduce their service area, the

evidence to date suggests the program is working. Of the seniors

enrolled in Medicare+Choice plans, 95 percent will be able to continue with their plan in the year 2000. The managed care industry, however, would have us believe

something very different. The industry claims its ability to continue

providing such benefits is in deep jeopardy because the Federal

Government is underpaying Medicare+Choice plans, a phenomena

it has dubbed ‘‘the fairness gap.’’ The fairness gap seems to me to

be nothing more than an attempt the obtain more money from the

Federal Government by scaring seniors into believing they are

going to lose their benefits. Let’s be clear about one thing: nobody is questioning the ability

of Medicare+Choice plans to provide the core benefits package. It

is the extra benefits, the ones that are most attractive to seniors,

such as prescription drug coverage, that we’re talking about. Unfortunately, this distinction is not always clear to seniors, nor is it

adequately explained to them by the industry. An April GAO report of this year found that many factors, not

just price considerations, were responsible for the recent withdrawals of managed care plans from the Medicare program. The fact is,

this is a good time for the managed care industry. Next year, every

13

managed care plan that serves Medicare beneficiaries will be paid

more than they were this year by an average of 5 percent.

The President’s Medicare reform plan, moreover, would provide

an incentive for the industry to continue to provide a drug benefit

at the same time such a benefit becomes available in the traditional fee-for-service program. Under that plan, HMOs would be reimbursed for about two-thirds of the cost for providing Medicare

beneficiaries with a prescription drug benefit.

I’m looking forward today to hearing the industry’s views of the

President’s Medicare reform plan, as well as the White House recently released report on Medicare beneficiaries’ access to prescription drugs. That report found that nearly three-fifths of managed

care plans are reporting that they will cap prescription drug benefits below $1,000 in the year 2000. It also found that the proportion

of plans with $500 or lower benefit caps will increase by over 50

percent between 1998 and 2000.

In sum, the report found that about 75 percent of Medicare beneficiaries lack decent, dependable, private sector coverage for prescription drugs, with one-third having no coverage at all.

In light of these facts, as well as the industry’s claim that it is

being underpaid by the Federal Government, I would think the industry would be eager to support the President’s proposal.

In addition to providing seniors with the prescription drug coverage they need, the net effect of that plan would be an increase

in Medicare funding for the industry. If the industry doesn’t support this plan, I would be interested to know why.

It seems to me if an HMO is already providing a prescription

drug benefit, it could use the money it would get under the President’s plan to provide the extra benefits the industry is claiming

are in such jeopardy today due to underpayments from the Federal

Government.

So, in addition to discussing the status of the Medicare+Choice

program, I look forward to also discussing the President’s prescription drug proposal. I think elements of that program could help fix

some shortcomings that everyone agrees exist and hope we can

make some progress in possible solutions to those shortcomings

today.

Thank you again, Mr. Chairman.

Mr. BILIRAKIS. I thank the gentleman.

I think that completes the opening statements.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE

Thank you, Mr. Chairman.

I am pleased that the Health and Environment Subcommittee is holding this

hearing today. I believe the Medicare+Choice program stands as one of this Committee’s most significant achievements. It is a success because it creates health care

options for seniors, while at the same time creating savings to help maintain the

solvency of the Medicare program.

Prior to the Balanced Budget Act of 1997, America’s seniors were faced with an

ailing Medicare program. Just as troubling, Medicare offered its beneficiaries little

or no freedom to obtain good, effective coverage.

The Medicare+Choice program changed all that. This program gives seniors access

to more choices than ever before, so that they can get better coverage than ever before.

Last year, 99 contracts between health plans and the federal government to participate in the Medicare+Choice program were either terminated or modified to servVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
14

ice a smaller area. Based on the recent Adjusted Community Rate filings by health

plans, it appears once again, there will be 99 contracts terminated or modified for

the year 2000. This instability in the program is alarming to me. In 1999, over

400,000 seniors were affected by plan pullouts, over 50,000 were left with no other

health plan option. For next year, it is estimated that 327,000 seniors will be affected, with nearly 80,000 seniors left without a health plan option. The real life

numbers are even more staggering. Whole families feel the disruption if even one

member of that family is affected.

Providing health care to the most vulnerable of our citizens—our seniors—is a serious matter and we must do all we can to ensure stability in their care. If payment

levels are the problem, we must look at that. If the cost of bureaucracy is the problem, we must address that. The program must be stable. That is why I am pleased

the Subcommittee Chairman called this hearing today—to find out what is happening and to determine what can be done to stabilize the Medicare+Choice program for seniors.

I am also pleased that HCFA is showing some interest in helping plans meet

many of the new BBA’97 compliance standards. For instance, their willingness to

move the ACR date for this year from May 1 to July 1, and the changes they announced about quality measures is encouraging. It is good for both the plans and

the beneficiaries.

I want to reiterate what I said in February that this Committee takes a dim view

of regulations that exceed their statutory basis. That is why we will continue formal

inquiries by this Committee into this important program and its implementation.

Again, Mr. Chairman, thank you for convening this hearing today. I yield back

the balance of my time.

PREPARED STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF FLORIDA

Thank you, Chairman Bilirakis, for holding this important hearing today. I look

forward to hearing from our witnesses about why they believe managed care plans

are withdrawing from the Medicare+Choice program in certain regions of the country and what can be done to prevent further defections from the program.

As you know firsthand, Mr. Chairman, the state of Florida is one of the states

that will be most impacted by these pull outs—29,000 beneficiaries will be affected.

In Lake County, Florida, which is in my district, more than 2,000 beneficiaries participating in Medicare+Choice have been told that the HMO in which they are enrolled has decided to pull out by the end of the year and there is nothing to replace

it.

Last year 400,000 beneficiaries nationwide were affected by plans that either altered or terminated their contracts with HCFA. Plans pulled out in large part because of the new requirements for filing adjusted community rates (ACRs) and the

uncertainty about the new risk adjustment methodology being proposed by HCFA.

Last February we held a hearing to review the risk-adjuster mandated by Congress to be implemented by the Health Care Financing Administration which was

intended to measure the true cost of patient care.

At that same hearing in February several witnesses expressed reservations about

HCFA’s intent to design a risk adjustment methodology based solely on hospital utilization data because it was felt that it could result in increased and inappropriate

hospital use. This would bring with it increased avoidable costs and could harm

beneficiaries in plans with enrollees who receive care for expensive chronic illnesses

outside the hospital setting.

In addition to implementing its risk adjuster, HCFA has also decided to cut payments to Medicare by $11.2 billion over the next five years. This would be disastrous and it is not what Congress intended. I want to applaud Chairman Bilirakis

for introducing H.R. 2419, the Medicare+Choice Risk Adjustment Amendments of

1999, which would require HCFA to implement its risk adjustment process on a

budget neutral basis as Congress intended in the 1997 BBA. It would also repeal

current law that automatically requires the annual increase in Medicare+Choice

payments to be lower than the annual increase in Medicare fee-for-service payments, which has caused HMOs to reduce services. I am pleased to be a cosponsor

of this much needed fix to a very misguided policy being pursued by HCFA officials.

Although affected Medicare beneficiaries can switch to the fee-for-service program,

I want to work with this Administration to provide these individuals the option of

retaining their HMO coverage under Medicare. Offering a choice in health care

plans is essential to providing quality care at a reasonable cost.

15

I believe that most of here in this room do not want to see payments to this program reduced by an additional $11 billion as HCFA seems to be advocating. What

we must ensure is that future payments are not ratcheted down by a faulty risk

adjustment methodology using skewed data.

Thank you, Mr. Chairman.

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

Today the Health and Environment Subcommittee will discuss this country’s most

popular social insurance program, Medicare. I thank Chairman Bliley and Subcommittee Chairman Bilirakis for scheduling a hearing on such a crucial topic.

Since its inception, the Medicare program has provided high-quality health care

to our nation’s senior citizens and people with disabilities. Once the age group with

highest uninsurance rates, seniors today are the only population in our country with

nearly universal coverage.

Recently, we made a number of changes to the Medicare program which have introduced new challenges. For example, we must now determine how to provide continuity and stability for seniors when plan participation in Medicare is based on a

variety of factors, some of which are beyond the control of the program. Another

challenge will be modernizing the program to keep pace with the rapidly changing

health care system.

One way to accomplish this goal is to focus our efforts on modernizing the Medicare benefit package for all seniors and people with disabilities. The President’s

Medicare plan would include a prescription drug benefit for all seniors who chose

to enroll, modernize the Medicare fee-for-service program, and extend the life of the

Medicare trust fund until 2027 by setting aside nearly 800 billion dollars of the federal surplus. This responsible and equitable proposal would strengthen Medicare

well into the next century, so that the 30 million baby boomers who will become

beneficiaries over the next few decades can depend on the same program that their

parents do today.

I look forward to working with the Committee to ensure that Medicare remains

a guaranteed benefit for all seniors and people with disabilities.

Mr. BILIRAKIS. Dr. Robert Berenson is director for the Center for

Health Plans and Providers with Health Care Financing Administration.

Dr. Berenson, obviously your written statement is made a part

of the record. I will set the clock at 10 minutes. I may have to interrupt you halfway through your presentation because, as you

know, we have a series of votes on the floor.

Dr. Berenson?

STATEMENT OF ROBERT A. BERENSON, DIRECTOR, CENTER

FOR HEALTH PLANS AND PROVIDERS, HEALTH CARE FINANCING ADMINISTRATION

Mr. BERENSON. I’ll try to do my opening statement as quickly as

possible to get into the questions.

Chairman Bilirakis, Congressman Brown, distinguished subcommittee members, thank you for inviting me to discuss the

Medicare+Choice program.

Despite challenges facing this program, it continues to grow.

There are now more enrollees in the Medicare+Choice program

than there were before. Some plans made business decisions last

year to trim their participation in the program, and I would point

to the one chart that I have, which shows that there was, indeed,

a drop off representing the withdrawals from last year, but that,

indeed, by July there were, in fact, 200,000 more beneficiaries in

Medicare+Choice plans than there were before the pull-outs, and

hopefully that will happen again in the future.

16

What doesn’t get as much attention is that we are reviewing new

applications and service area expansions—and I’ll get into more details about that in the Qs and As—but the program does continue

to grow.

The vast majority of enrollees are not affected by these plans’ decisions to leave Medicare+Choice; nevertheless, we are concerned

about the disruption to beneficiaries and have taken steps to ensure that those being forced to change their health insurance coverage are informed of their rights to obtain certain Medigap plans,

regardless of preexisting conditions. We also are ensuring that they

receive clear information about their health care options.

Many factors affect plan decisions to trim participation in M+C,

as the GAO documented in the report released this past April. For

instance, plans may have trouble establishing adequate provider

networks, enrolling enough beneficiaries to support fixed costs, or

otherwise competing in a given market.

Plans withdrawing from Medicare in specific markets often are

withdrawing from those same markets in their commercial FEHBP

or other business.

Reimbursement to plans does not explain their decisions to trim

participation. Payment is rising in all counties by an average of 5

percent for next year, and will rise by as much as 18 percent in

some areas.

BBA reforms were designed to increase payment in counties that

had the lowest rates, yet counties receiving the largest increases

under the BBA payment system are experiencing the most disruption.

In fact, despite BBA reforms, aggregate payments to plans continues to be excessive, according to another GAO report issued in

June.

BBA reforms may, however, mean that payments in some counties no longer include enough excess to cover losses in other areas

or to subsidize extra benefits that fee-for-service Medicare does not

currently cover, especially prescription drugs.

As such, plans are less likely to provide extras like drug coverage

without charging premiums. In plans that do offer a drug benefit,

its value is declining. Drug coverage by plans is available mostly

in high-paid urban areas, which is unfair to rural beneficiaries,

who also have the least access to private retiree drug coverage.

Private retiree coverage, itself, is unstable and declining, with

now less than a third of the firms offering it, and at least a third

of all beneficiaries have no drug coverage at all.

Clearly, all beneficiaries need a more stable and reliable source

of prescription drug coverage, and if a plan’s primary problem is

paying for benefits beyond the Medicare benefit package, the best

solution is to provide all beneficiaries with access to an affordable

prescription drug benefit and pay plans explicitly for what most

now offer in areas where payments are excessive.

That is why it is essential to enact the President’s Medicare reform plan. It gives all beneficiaries the option to pay a modest premium for prescription drug benefit. Medicare+Choice plans would

be explicitly paid for providing a drug benefit and would no longer

have to depend on what the payment rate is in a given area to determine whether they can afford to offer a drug benefit.

17

The President’s plan also would modernize the way Medicare

pays managed care plans, overall. Rates would be set through competition among plans, rather than through a complicated statutory

formula which causes the kinds of discussions that we’ve had here

so far today.

All plans will be paid their full price through a combination of

government and beneficiary payments. The lower the price, the less

beneficiaries pay, since the beneficiary contribution rate declines

relative to the price of the plan, as in the Federal Employees

Health Benefits Program.

The President’s plan also will preserve beneficiary options and

strengthen protections from plans’ withdrawal from Medicare. It

will give beneficiaries access to all Medigap plans, regardless of

preexisting conditions, including those with prescription drug coverage. It expands the Medigap 6-month open enrollment period to

newly disabled beneficiaries and those with end-stage renal disease. It allows beneficiaries with ESRD to enroll in another plan.

These and other changes will strengthen and stabilize the Medicare managed care market. While market volatility must be expected in the private sector, we can and should take steps to stabilize the Medicare+Choice market.

Mr. BILIRAKIS. Doctor, forgive me. I don’t think we should be

rushing you. What you have to share with us is very important and

we’re kind of shooting right through it. So we probably only have

four votes——

Mr. BERENSON. I’m just finishing up.

Mr. BILIRAKIS. You’re finishing up?

Mr. BERENSON. Yes. I’m in my last paragraph.

Mr. BILIRAKIS. Go ahead. Finish it.

Mr. BERENSON. We remain committed to working with plans to

facilitate participation in the program, and we look forward to

working with Congress to enact the President’s Medicare reform

proposals.

I thank you again for holding this hearing, and I’m available to

answer questions.

[The prepared statement of Robert A. Berenson follows:]

PREPARED STATEMENT OF ROBERT A. BERENSON, DIRECTOR, CENTER FOR HEALTH

PLANS & PROVIDERS, HEALTH CARE FINANCING ADMINISTRATION

Chairman Bilirakis, Congressman Brown, distinguished Subcommittee members,

thank you for inviting us to discuss the Medicare+Choice program. Despite challenges facing this program, it continues to grow. About 50,000 beneficiaries have enrolled in Medicare+Choice plans each month since January. There are now more enrollees in the program than there were before some plans made business decisions

last year to trim their participation in the program. We expect to see continued program growth despite similar decisions by some plans this year.

The vast majority—95%—of Medicare+Choice enrollees are not affected by pending changes in plan participation. Nevertheless, we are concerned about the disruption in service to beneficiaries, particularly to disabled beneficiaries and those who

have relied on prescription drug benefits that they may no longer be able to receive.

Because of the recent actions by health plans, we have taken steps to ensure that

beneficiaries being forced to change their health insurance coverage are informed of

their rights to obtain certain Medigap plans regardless of preexisting conditions. We

also are ensuring that they receive clear information about their health care options.

Still, the disruptions underscore the importance of the President’s Medicare reform plan. It will stabilize the Medicare managed care market by:

• setting plan payment rates through market competition rather than a statutory

formula;

18

• ensuring that all beneficiaries have access to affordable drug coverage;

• paying plans directly for providing drug coverage;

• dedicating a significant portion of the budget surplus to Medicare to help ensure

that payment rates will be adequate well into the future; and,

• strengthening protections for beneficiaries when plans withdraw.

BACKGROUND

Medicare+Choice allows private plans to offer beneficiaries a wide range of options, similar to what is available in the private sector today. It requires a massive

new beneficiary education campaign to inform beneficiaries about these options. It

includes important new protections for patients and providers, as well as statutory

requirements for quality assessment and improvement. And it initiates a 5-year

transition to a fairer and more accurate payment system.

Medicare+Choice success is a high priority for us. We believe very strongly that

private plans are important voluntary options next to original Medicare. Medicare

managed care enrollment has tripled under the Clinton Administration, and there

are now 6.48 million beneficiaries enrolled in Medicare+Choice plans. We meet regularly with beneficiary advocates, industry representatives, and others to discuss

ways to improve the program. We launched a national education campaign and participated in more than 1,000 events around the country to help beneficiaries understand their health plan options. And we are establishing a federal advisory committee to help us better inform beneficiaries about Medicare.

Reductions in Service

Plans make business decisions each year about the extent to which they will continue participation in Medicare+Choice. As of the July 1 deadline for plans to notify

us about their participation next year, 99 Medicare+Choice plans will reduce the

services they provide as of January 1, 2000. This includes withdrawals from the program by 41 specific plans and cuts in the geographic regions served by another 58

plans. These changes affect about 327,000 beneficiaries in 329 counties in 33 States,

or about 5% of all Medicare+Choice enrollees. The total is less than the 407,000

beneficiaries in 407 counties in 29 States who were affected last year. An even

smaller number, 79,000 (1.3%), will return to traditional Medicare because the only

managed care plan available in their county is leaving. This is more than the 51,000

abandoned enrollees left without access to another managed care plan last year.

As directed by President Clinton in 1998, we will continue to expedite review and

approval of plans seeking to enter markets that have been left without a plan. We

have approved 41 plans for participation or expansion in the program since last

July, and we are reviewing applications to start or expand participation by another

22 plans. Total managed care enrollment this year returned to pre-withdrawal levels within just two months.

Many factors affect plan decisions to trim participation in Medicare+Choice, as

was documented in a report released by the General Accounting Office (GAO) in

April. For instance, plans may have trouble establishing adequate provider networks, enrolling enough beneficiaries to support fixed costs, or otherwise competing

in a given market. Plans withdrawing from Medicare in specific markets often are

withdrawing from those same markets in their commercial and other business. For

example, Pacificare is withdrawing both Medicare and commercial service in several

Washington State counties. And the Federal Employee Health Benefit Plan expects

about about 13 percent of plans to withdraw from its program this year, affecting

about 1% of its enrollees. There are a disproportionate number of withdrawals this

year in rural areas where it is more difficult to maintain provider networks and enrollment level.

Payment Increases

Inadequate reimbursement to plans does not explain plan decisions to trim participation in the program. Payment is rising in all counties this coming year by an

average of 5%, and will rise by as much as 18% in some areas. Balanced Budget

Act (BBA) payment reforms were designed to increase payment in counties that had

the lowest rates and therefore the fewest number of plans. Yet counties receiving

the largest increases under the BBA payment system are experiencing the most disruption. Plan withdrawals are affecting 11.1% of enrollees in counties where rates

are rising by 10%, but affecting only 2.3% of enrollees where rates are rising by just

2%.

In fact, despite BBA reforms, aggregate payment to plans continues to be excessive, according to another GAO report issued in June. BBA reforms may, however,

mean that payments in some counties no longer include enough excess to cover

19

losses in other areas or to subsidize extra benefits that fee-for-service Medicare does

not currently cover, such as prescription drugs.

As such, plans are less likely to provide extras like drug coverage without charging premiums. In plans that do offer a drug benefit, its value is declining. In 1998

only a third of plans capped drug coverage below $1000, but next year nearly three

fifths will, and more than one fourth will cap coverage below $500. Drug coverage

by plans is available mostly in high-paid urban areas, which is unfair to rural beneficiaries who also have the least access to private retiree drug coverage. Private retiree coverage itself is unstable and declining, with now less than a third of firms

offering it. And at least a third of all beneficiaries have no drug coverage at all.

Clearly all beneficiaries need a more stable and reliable source of prescription

drug coverage. And, if plans’ primary problem is paying for benefits beyond the

Medicare benefit package, the best solution is to improve the benefit package by providing all beneficiaries with access to an affordable prescription drug benefit, and

paying plans explicitly for what most now offer only in areas where payments are

excessive.

The President’s Reform Plan

That is why it is essential to enact the President’s Medicare reform plan. It gives

all beneficiaries the option to pay a modest premium for a prescription drug benefit.

This benefit will cover half of all prescription drug costs up to $5,000 when fully

phased in, with no deductible—all for a modest premium that will be less than half

the price of the average private Medigap policy.

Medicare+Choice plans would be explicitly paid for providing a drug benefit under

the President’s plan. They would no longer have to depend on what the rate is in

a given area to determine whether they can offer to do so.

The President’s plan also will modernize the way Medicare pays managed care

plans. Rates would be set through competition among plans rather than through a

complicated statutory formula, as they are today. All plans would be paid their full

price through a combination of government and beneficiary payments. The lower the

price, the less beneficiaries pay since the beneficiary contribution rate declines relative to the price of the plan, as in the Federal Employees’ Health Benefits Program. Beneficiaries choosing plans that cost approximately 80% of traditional feefor-service will pay no Part B premium.

The President’s plan also will preserve beneficiary options and strengthen protections when plans withdraw from Medicare by:

• giving beneficiaries access to all Medigap plans regardless of preexisting conditions, including those with prescription drug coverage; • expanding the Medigap 6-month open enrollment period to newly disabled beneficiaries and those with end stage renal disease; • allowing beneficiaries with end stage renal disease to enroll in another plan; • mandating a special one-time additional Medigap open enrollment period for beneficiaries who were affected by a plan termination last fall; and

• increasing civil monetary penalties of up to $50,000 per violation plus $5,000 per

day per violation of the Medigap open enrollment requirements.

All these changes will strengthen and stabilize the Medicare managed care market.

The President’s plan also dedicates 15 percent of the budget surplus to Medicare

for the next 15 years. This will assure the financial health of the Medicare Trust

Fund through at least 2027, and help ensure that Medicare+Choice plan payment

rates will be adequate well into the future.

Encouraging Plan Participation

To assist plans, we worked with Congress to give plans two more months to file

the information used to approve benefit and premium structures. We allowed plans

to submit this ‘‘Adjusted Community Rate’’ data on July 1, rather than May 1, so

plans were able to use more current experience when designing benefit packages

and setting cost sharing levels. July 1 is the latest we can accept, process, and approve premium and benefit package data, have the data validated, and still mail

beneficiaries information about available plans in time for the November open enrollment.

To further encourage plan participation, we have worked with plans to minimize

the administrative workload associated with participating in Medicare+Choice. In

February, we published initial refinements to the Medicare+Choice regulation that

improve beneficiary protections and access to information while making it easier for

health plans to offer more options to beneficiaries. The new rule:

• clarifies that beneficiaries in a plan that leaves the program are entitled to enroll

in remaining locally available plans;

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• specifies that changes in plan rules must be made by October 15 so beneficiaries

have information they need to make an informed choice during the November

open enrollment;

• allows plans to choose how to conduct the initial health assessment;

• waives the mandatory health assessment within 90 days of enrollment for commercial enrollees who choose the same insurer’s Medicare+Choice plan when

they turn 65, and for enrollees who keep the same primary care provider when

switching plans;

• stipulates that the coordination of care function can be performed by a range of

qualified health care professionals, and is not limited to primary care providers;

• limits the applicability of provider participation requirements to physicians; and,

• allows plans to terminate specialists with the same process for terminating other

providers.

We intend to publish a comprehensive final rule with further refinements this

fall.

BBA Payment Reforms

While the President’s reform plan will use competition to set plan payment rates,

the BBA initiated other important payment reforms that are already underway. The

BBA begins to break the link between managed care and fee-for-service rates. And,

starting in January, the BBA mandates that we ‘‘risk adjust’’ payments to account

for the health status of each enrollee.

Under the BBA system, a rate for a particular county is the greater of three possible rates: a new minimum or ‘‘floor’’ payment; a minimum 2% increase over the

previous year’s rate, or a blend of the county rate and an input price adjusted national rate. The new system is phased in over five years, and therefore has several

different moving parts. Medical education costs, which had been included in HMO

payments under the old system, are paid instead directly to teaching hospitals. The

blend of county and national rates phases up to a 50/50 balance. The national rate,

local rates and minimum payment amount are annually updated based on per capita Medicare cost growth. As mentioned above, payments will increase an average

of 5% for next year.

The BBA also established a competitive pricing demonstration in which plan payment rates will be set through a bidding process, similar to what most employers

and unions use to decide how much to pay plans. To ensure broad community involvement in this project, a Medicare Competitive Pricing Advisory Commission,

chaired by General Motors Health Care Initiative Executive Director James Cubbin,

has made recommendations regarding key design features. It also has selected the

markets of Phoenix, Arizona and Kansas City, Kansas and Missouri, as initial demonstration sites. We established local advisory committees in these communities

and, at their request, the national advisory commission agreed to delay implementation for one year in order to ensure adequate time for all parties to prepare for this

essential project.

There is considerable evidence that we have overpaid and continue to overpay

plans. That is because payments are linked to local fee-for-service spending and not

adjusted for risk, according to studies by the Congressional Budget Office, Physician

Payment Review Commission, Mathematica Policy Research, and many others. As

mentioned previously, a GAO report released this June documents that, despite

BBA reforms, plans are still being paid more than it costs them to provide the Medicare covered services that they are required to provide. The GAO says excess payments to plans totaled $1.3 billion in 1998, and will increase each year because of

a forecasting error that the BBA locked in the statutory payment formula.

Payment to plans will be more accurate with risk adjustment. Data on each individual beneficiary use of health care services in a given year will be used to adjust

payment for that beneficiary the following year. Risk adjustment helps assure that

payments are more appropriate, and curtails the disincentive to enroll sicker beneficiaries.

The law does not call for a transition to risk adjustment, but we believe incremental implementation will prevent disruptions to beneficiaries or the

Medicare+Choice program. We are therefore using flexibility afforded to us in the

law to phase in risk adjustment over five years. In the first year, only 10% of payment to plans for each beneficiary will be based on the new risk adjustment method,

which for the time being is based only on inpatient data. By 2004, we will be able

to use data from all sites of care for risk adjustment. Then, and only then, will payment to plans be 100% based on risk adjustment. In the meantime, even with its

limitations, the initial risk adjustment system based on inpatient data alone will increase payment accuracy 5-fold.

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It is essential to stress that risk adjustment will not and cannot be budget neutral. The whole reason for proceeding with risk adjustment is that Medicare has not

been paying plans accurately. Congress also recognized that plans have been paid

too little for enrollees with costly conditions, and too much for those with minimal

care needs. The vast majority of beneficiaries enrolled in Medicare+Choice cost far

less than what Medicare pays plans for each enrollee.

Medicare fee-for-service statistics make clear why risk adjustment should not be

budget neutral. More than half of all Medicare fee-for-service beneficiaries cost less

than $500 per year, while less than 5% of fee-for-service beneficiaries cost more

than $25,000 per year, according to the latest available statistics for calendar year

1996. The most costly 5% account for more than half of all Medicare fee-for-service

spending.

Since Medicare+Choice enrollees tend to be healthier than fee-for-service Medicare beneficiaries, the ratio of high to low cost beneficiaries in health plans is even

more stark. Clearly, care for the overwhelming majority of Medicare enrollees cost

plans much less than what Medicare pays because our payments are predicated on

the average beneficiary cost of care, calculated by county. This average includes the

most expensive beneficiaries in fee-for-service, who generally do not enroll in managed care.

Budget neutral risk adjustment would mean Medicare and the taxpayers who

fund it would continue to lose billions of dollars each year on Medicare+Choice.

Budget neutral risk adjustment would cost taxpayers an estimated $200 million in

the first year of the phase-in, and $11.2 billion over five years if health plans maintained their current, mostly healthy beneficiary mix. Actual savings to taxpayers

from risk adjustment will vary to the extent that less healthy beneficiaries enroll

in Medicare+Choice plans, resulting in higher payments than health plans receive

today.

The amount of payment change will vary among plans and depend on each plan’s

individual enrollees. Overall, we project that payment on average will change by

less than 1% in the first year. How it will change over time depends on the mix

of beneficiaries in each plan. Risk adjustment significantly changes incentives for

plans and could well lead to enrollment of beneficiaries with greater care needs who

could benefit most from managed care. That could result in plans receiving higher

payments. Phasing in risk adjustment also substantially buffers the financial impact. Taxpayers are forgoing $1.4 billion in the first year and up to $4.5 billion over

the full five years because of the phase in.

Beneficiary Education

We are working to help beneficiaries affected by plan withdrawals move to other

plans or back to traditional Medicare. We are working diligently to make sure beneficiaries affected by plan terminations and service area reductions know about their

rights and options. We are providing plans with a model letter that meets the requirement that they send all affected beneficiaries an information package by September 15, 1999. This information should explain options to return to fee-for-service

Medicare with supplemental coverage or to enroll in another Medicare HMO. We

review and approve all materials sent by plans to beneficiaries to ensure that they

are accurate.

All beneficiaries have the option of returning to original fee-for-service Medicare.

Most beneficiaries also have the option of enrolling in another Medicare HMO where

they live. If beneficiaries take no action, they will automatically return to original

fee-for-service Medicare on Jan. 1, 2000. If they return to fee-for-service Medicare

before December 31, they may lose important rights to supplemental Medigap coverage.

For example, beneficiaries who remain in a withdrawing plan until December 31

are guaranteed the right to buy any Medigap plan designated A, B, C, or F available

in their state until March 3, 2000. If they apply for one of these Medigap policies

no later than March 3, companies selling the policies cannot place limits or discriminate in price because of beneficiary preexisting conditions. These protections are not

guaranteed if beneficiaries disenroll before December 31, 1999 which, as mentioned

above, is a policy that the President’s Medicare reform plan will change.

Help in understanding such rights and options, as well as up-to-date information

about other Medicare+Choice plans available in a given county, is available at 1-

800-MEDICARE (1-800-633-4227), at 1-877-486-2048 for the hearing impaired, and

on the Medicare Compare web page at www.medicare.gov. Many libraries and senior

centers can help beneficiaries obtain Medicare information from the Internet. Beneficiaries also can contact their State Health Insurance Assistance Program for assistance. And many other groups provide information about Medicare, including the

22

AARP, local Area Agency on Aging offices, National Rural Health Association, Social

Security Administration and HCFA regional offices.

We are also working diligently to educate all beneficiaries about the

Medicare+Choice program. We launched the National Medicare Education Program

to make sure beneficiaries receive accurate, unbiased information about their benefits, rights, and options. The campaign includes:

• mailing a Medicare & You handbook to explain health plan options;

• a toll-free ‘‘1-800-MEDICARE’’ [1-800-633-4227] call center with live operators to

answer questions, and provide detailed plan-level information;

• a consumer-friendly Internet site, www.medicare.gov, which includes comparisons

of benefits, costs, quality, and satisfaction ratings for plans available in each zip

code;

• working with more than 120 national aging, consumer, provider, employer, union,

and other organizations who help disseminate information to their constituencies;

• beneficiary counseling from State Health Insurance Assistance Programs;

• a national publicity campaign;

• a Regional Education About Choices in Healthcare (REACH) campaign that will

conduct State and local outreach activities nationwide; and,

• a comprehensive assessment of these efforts.

We tested the system in five States in 1998 and learned how to improve efforts

for this November’s open enrollment period. For example, we have made the Medicare & You handbook easier to use and improve the accuracy of information about

plans that are withdrawing. We have added new links on our Medicare Compare

website at www.medicare.gov to help users find information faster. We are standardizing plan marketing materials that summarize benefits so beneficiaries can

more easily make apples-to-apples comparisons among plans in this November’s

open enrollment period. And we have added information on managed care plan

withdrawals to the Important Notes section of the 1999 plan information on our

Medicare Compare website.

To help us continually improve our education efforts, we are establishing the Citizens’ Advisory Panel on Medicare Education, under the Federal Advisory Committee

Act. The panel will help enhance our effectiveness in informing beneficiaries

through use of public-private partnerships, expand outreach to vulnerable and underserved communities, and assemble an information base of ‘‘best practices’’ for

helping beneficiaries evaluate plan options and strengthening community assistance

infrastructure. Panel members will include representatives from the general public,

older Americans, specific disease and disability groups, minority communities,

health communicators, researchers, plans, providers, and other groups.

CONCLUSION

While market volatility must be expected in the private sector, we are concerned

about the message being sent to beneficiaries about the reliability of

Medicare+Choice plans. In fact, among beneficiaries affected by plan service reductions last year, half of those who could have chosen another managed care plan instead chose to return to the original fee-for-service Medicare program. Nonetheless,

we remain committed to working with plans to facilitate participation in the program. And we look forward to working with Congress to enact the President’s Medicare reform proposals that will increase protections for beneficiaries when plans

withdraw from the program, ensure that plans receive full payment of market-based

rates, and guarantee that all beneficiaries have access to affordable prescription

drug coverage. I thank you again for holding this hearing, and I am happy to answer your questions.

23

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Mr. BILIRAKIS. Thank you very much, Doctor.

We will break. We have at least two votes. Just as soon as we

are able to get back, we’ll continue.

Mr. BERENSON. Thank you.

[Brief recess.]

Mr. BILIRAKIS. The committee will come to order.

Thank you, Dr. Berenson, for your testimony, and also for your

patience and understanding.

Dr. Berenson, I think—and I would hope that you agree—that

the intent of the legislature, the intent of Congress is to be taken

very seriously.

As far as you know, was there any doubt in the minds of HCFA

as to what was intended by the Congress in BBA in 1997 in terms

of the risk adjustor and remaining neutral?

Mr. BERENSON. Yes, I think we actually do have a different view

of what was intended. In fact, just recently this issue came up

about the intent of Congress regarding risk adjustment and budget

neutrality—I wasn’t around at the time, but people went back into

the files and into the record and we found a report from the CBO

dated November 12, 1997, entitled, ‘‘Medicare+Choice Provisions in

the Balanced Budget Act,’’ and on page 13 it says, ‘‘Adding a health

status adjustor can further reduce capitation rates relative to per

capita fee-for-service cost. The size of the additional reduction

would depend on the extent of the selection bias and the risk sector

when the new adjustor is put in place how effectively the adjustor

accounts for the selection.’’

We think that’s a CBO analysis that at that time understood

that the risk adjustor might result in decreased payments to the

plans.

Our understanding was that it wasn’t scored as a savings because there was some question about our ability to implement the

risk adjustor on time and they weren’t sure what the details would

be.

But I think we don’t agree that the intent was for budget neutrality in risk adjustment.

Mr. BILIRAKIS. Well, Congress now needs to share with HCFA its

intent and clarify that—and I agree with you that maybe it wasn’t

all that clear. Although CBO has testified in a hearing before the

Senate Committee on Finance on June 9 of this year—a statement

by Steve Lieberman, Executive Associate Director of the Office of

Director of CBO—I would ask unanimous consent this might be put

in the record and, without objection, that will be the case—they

have stated on page 6 of that, ‘‘Until 1999, CBO had assumed that

Medicare+Choice payments would be adjusted for risk without

changing total outlays.’’ And the total outlays that are envisioned

by HCFA, as I understand it, are in the category of $11 billion in

savings.

[The prepared statement by Steven M. Lieberman follows:]

PREPARED STATEMENT OF STEVEN M. LIEBERMAN, EXECUTIVE ASSOCIATE DIRECTOR,

OFFICE OF THE DIRECTOR, CONGRESSIONAL BUDGET OFFICE

Mr. Chairman, Senator Moynihan, and Members of the Committee, it’s a pleasure

to appear before you today to discuss the enrollment and payment issues confronting the Medicare+Choice program. The growth in that program’s enrollment is closely linked to the adequacy and appropriateness of Medicare’s capitaled payments.

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The recent withdrawal of plans from Medicare+Choice, coupled with reduced growth

in payments, has prompted some observers to worry about the future of the

Medicare+Choice program.

My testimony discusses the Congressional Budget Office’s (CBO’s) projection of

enrollment in Medicare+Choice plans over the next 10 years and the factors influencing growth in that enrollment. Financial incentives play a critical role in determining whether plans participate in Medicare+Choice, whether beneficiaries enroll,

and whether providers deliver appropriate services in an efficient manner.

For Medicare+Choice to be a viable program, beneficiaries must have incentives

to relinquish traditional fee-for-service and enroll instead in competing health plans.

The challenge is to have a system that yields greater returns when it efficiently provides necessary, high-quality services and smaller returns when it provides inefficient, low-quality, or unnecessary services. Meeting that challenge requires that

plans, providers, and beneficiaries each bear some degree of financial risk. Serious

problems can result if Medicare payments do not bear a reasonable relationship to

the costs of care for each group of beneficiaries for which plans and providers accept

risk. Payments to providers must be fair and, ideally, give incentives to control costs

while rewarding quality.

If consumers have a choice of health plans offering various combinations of benefits and premiums, they can select the plan that best meets their needs. Enrollment

in Medicare+Choice plans would grow if those plans offered better benefits or lower

costs than traditional Medicare. If consumers have no choice of plans or if those

plans offer unattractive benefits, high costs, or poor quality, beneficiaries will remain in fee-for-service Medicare.

ENROLLMENT IN THE MEDICARE+CHOICE PROGRAM

CBO projects that growth in Medicare+Choice enrollment will average 9 percent

annually between 1999 and 2009. Though quite rapid, that rate of increase represents a sharp reduction from earlier trends.

The Balanced Budget Act of 1997 (BBA) established Medicare+Choice and

changed payment provisions for both health maintenance organizations (HMOs) and

fee-for-service providers. CBO had assumed that Medicare+Choice enrollment would

continue to grow at the dramatic rates of the program it replaced. The annual rate

of growth in enrollment in Medicare’s risk-based plans peaked at 36 percent in fiscal

year 1996, however, and slowed in subsequent years. CBO projects that 31 percent

of all Medicare beneficiaries will join Medicare+Choice plans in 2009, up from 16

percent this year (see Table 1).

TABLE 1. ACTUAL AND PROJECTED ENROLLMENT IN RISK-BASED HMO PLANS AND

MEDICARE+CHOICE

Fiscal Year

Enrollees

Number

(Millions)

Percentage of

Medicare

Beneficiaries

Annual Growth

in (Enrollment

Percent)

Actual

1992 ........................................................................................................................ 1.4 4.0 n.a.

1993 ........................................................................................................................ 1.6 4.5 13.8

1994 ........................................................................................................................ 1.9 5.2 18.9

1995 ........................................................................................................................ 2.5 6.7 29.7

1996 ........................................................................................................................ 3.4 8.9 36.0

1997 ........................................................................................................................ 4.5 11.7 32.4

1998 ........................................................................................................................ 5.5 14.1 22.2

1999 ........................................................................................................................ 6.2 15.7 12.7

Projected

2000 ........................................................................................................................ 6.6 16.6 6.5

2001 ........................................................................................................................ 7.1 17.7 7.6

2002 ........................................................................................................................ 7.6 18.7 7.0

2003 ........................................................................................................................ 8.4 20.4 10.5

2004 ........................................................................................................................ 9.2 22.0 9.5

2005 ........................................................................................................................ 10.1 23.8 9.8

2006 ........................................................................................................................ 11.1 25.6 8.9

2007 ........................................................................................................................ 12.0 27.4 9.1

2008 ........................................................................................................................ 13.1 29.3 9.2

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TABLE 1. ACTUAL AND PROJECTED ENROLLMENT IN RISK-BASED HMO PLANS AND

MEDICARE+CHOICE—Continued

Fiscal Year

Enrollees

Number

(Millions)

Percentage of

Medicare

Beneficiaries

Annual Growth

in (Enrollment

Percent)

2009 ........................................................................................................................ 14.1 30.9 7.6

SOURCE: Congresional Budget Office.

NOTE: HMO=health maintenance organization; n.a.=not applicable.

HMO Withdrawals

Last year, 99 HMOs announced they were either terminating or, far more commonly, scaling back their Medicare+Choice operations in certain counties. The potential disruption involved 407,000 enrollees, accounting for 7 percent of all

Medicare+Choice enrollment. Plan withdrawals occurred in 406 counties—42 percent of the counties covered by Medicare managed care. Nonetheless, the overwhelming majority of the affected beneficiaries had the option to switch to a competing Medicare+Choice plan.

The unanticipated withdrawal of plans from the Medicare market has heightened

awareness that plans can leave the market. That perception is likely to reduce the

willingness of some Medicare beneficiaries to enroll in plans in the next few years.

Although the effects of plans’ withdrawal on Medicare+Choice enrollment seem relatively clear, explaining why plans withdrew appears more controversial.

In a recent report, the General Accounting Office concluded that most likely more

than one factor was responsible for the withdrawals.

No one factor can explain why plans choose to participate in particular counties. Although plans obviously consider payment rates, many other factors also

influence their business decisions.

The current movement of plans in and out of Medicare may be primarily the

normal reaction of plans to market competition and conditions... Other factors

associated with plan withdrawals—recent entry in the county, low enrollment,

and higher levels of competition—suggest that a number of Medicare plans

withdrew from markets in which they had difficulty competing.

By contrast, the HMO trade group, the American Association of Health Plans

(AAHP), attributes the withdrawals to inadequate payment rates, exacerbated by

the administrative burdens imposed by the Health Care Financing Administration’s

(HCFA’s) ‘‘MegaReg’’ for implementing the BBA’s provisions. AAHP believes that

without substantial revisions to Medicare+Choice, additional plans will withdraw

from the program.

Adverse publicity associated with the health plans’ withdrawal from

Medicare+Choice is likely to temporarily slow growth in enrollment. But over the

longer term, that growth depends critically on the size of payment increases and the

ability of plans to offer attractive additional benefits, such as prescription drugs.

Constraining Medicare+Choice Payments

Health plans, as businesses, will participate in Medicare+Choice markets only if

they have an expectation of an adequate return—at a minimum, if they can reasonably expect at least to cover costs. If payments are perceived as being inadequate,

health plans will tend not to participate in Medicare+Choice, especially if they foresee little prospect of Medicare payments becoming adequate.

A similar dynamic applies to providers. Regardless of mission or not-for-profit status, physicians and other providers cannot afford to participate indefinitely when

their enterprises are losing money.

In addition to causing plans to withdraw, inadequate Medicare+Choice payments

have another, compounding effect on enrollment growth. Reducing payment increases to Medicare+Choice plans will impede their ability to offer extra benefits or

limit beneficiary cost sharing. Taking steps such as eliminating prescription drug

benefits or requiring hefty monthly premiums instead of ‘‘zero premiums’’ will make

Medicare+Choice plans less attractive to consumers. As a result, fewer beneficiaries

will choose to join those plans.

Are Medicare+Choice payments inadequate? The adequacy of payments can be

evaluated from five often-competing perspectives.

• Are plans able to provide appropriate services while remaining financially stable?

• Are payments fair, permitting (if not encouraging) plans and providers to serve

sicker patients?

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• Is there an adequate choice of health plans in both urban and rural parts of the

country? • Do the payments offered by Medicare+Choice plans attract physicians, hospitals,

and other providers to participate in their networks? • Do the payments help keep Medicare affordable for both beneficiaries and taxpayers?

Having well-established plans ‘‘vote with their feet’’ and withdraw from their key

Medicare+Choice markets is an indication that payment and other conditions of participating in Medicare+Choice may be too stringent. But health plans have powerful

incentives to convince policymakers that Medicare+Choice payments need to be increased without having to withdraw from the program.

CHANGES TO MEDICARE+CHOICE PAYMENTS UNDER THE BALANCED BUDGET ACT

The BBA enacted six policies that affected Medicare+Choice payments.

• The BBA significantly reduces fee-for-service spending, which also slows the

growth of payments to health plans because annual updates to Medicare+Choice

payment rates are tied to the growth in per-enrollee spending in the traditional

Medicare program. • The BBA sets the annual increases in Medicare+Choice payment rates below the

growth in fee-for-service spending from 1998 through 2002. • The portion of Medicare+Choice payment rates that is attributable to fee-for-service spending for graduate medical education will be gradually eliminated. • HCFA will withhold about 0.2 percent of payments to Medicare+Choice plans to

pay for dissemination of information to beneficiaries about their coverage options. • A blend of local and national payment rates will be phased in for

Medicare+Choice plans. That blending provision redistributes money from areas

with high payment rates to those with low payment rates. • New payment risk adjusters will be implemented in two stages. Those adjusters

are intended to more accurately reflect the expected costs of providing health

care to enrollees in Medicare+Choice plans.

The first four policies were enacted with the expectation that they would slow the

growth of Medicare spending. Those policies reduce the cumulative growth in

Medicare+Choice payment rates relative to fee-for-service payments by 6 percent.

The blending of local and national payment rates is purely redistributive, but particular counties will see substantial changes in payment rates. The new risk adjusters were not necessarily expected to lower average payments to Medicare+Choice

plans but, as discussed below, they could yield substantial program savings when

they are implemented.

Impact of the Payment Blend

Because of the blending of national and local payment rates, payment increases

are projected to vary enormously from county to county. For example, some counties

would experience such large increases in payment rates from 1997 to 2000 that the

theoretically available Medicare+Choice payment rates—if any plans operated in the

areas—would exceed 180 percent of the 1997 (pre-BBA) payment rates. In contrast,

some counties with high payment rates would see only a 6.1 percent increase in

their rates over the same period.

Historically, both the level of and increase in Medicare spending per beneficiary

varied dramatically in different counties. HCFA, however, no longer produces those

data on county-specific spending trends. If past trends continue, some

Medicare+Choice plans will face payment rates that are projected to be substantially below both per capita fee-for-service spending and 1997 (pre-BBA) amounts.

Over half (52) of the 100 counties with the most Medicare+Choice enrollees are

projected to have payment rates fall by 5 percent or more using as the standard

of comparison the rates that Medicare would have paid if 1997 payments were increased by the national average growth in per capita fee-for-service spending and

the BBA payment provisions were fully in effect. Using that methodology, the steepest reduction is estimated to be 12 percent. In the top 100 counties, 88—home to

78 percent of the enrollees—would experience declines in payment rates, compared

with 1997 rates. These estimates do not include the lower payments resulting from

HCFA’s implementation of risk adjustment.

Impact of Risk Adjustment

Until 1999, CBO had assumed that Medicare+Choice payments would be adjusted

for risk without changing total outlays. In January, the Administration published

plans to phase in risk adjustment in a manner that would reduce payment rates

for enrollees in Medicare+Choice plans. The first stage of risk adjustment would be

28

based on the use of impatient hospital services by individual enrollees. That change

would reduce payments for existing enrollees by 7.6 percent when fully phased in—

by 2004. The Administration also announced a second stage of risk adjustment that

would be based on use of services in all settings. The Administration expects that

such an adjustment would reduce payments by another 7.5 percent, beginning in

2004. If both plans are implemented as announced, the combined effect could reduce

payments by about 15 percent.

Payment reductions related to risk adjustment on the order of 15 percent would

be likely to cause plans to drop out of the program and enrollment in

Medicare+Choice to drop sharply. Because of the magnitude of the planned reduction and the discretion retained by the Administration in implementing the adjusters, the CBO baseline does not assume the full savings from risk adjustment. For

the same reason, the projections of Medicare+Choice enrollment discussed in my testimony today explicitly do not reflect the full savings. Instead, CBO assumes that

risk adjustments will ultimately reduce payments by lesser amounts.

RISK SELECTION AND RISK ADJUSTMENT

Risk selection occurs when groups of beneficiaries, such as those who enroll in a

Medicare+Choice plan, have average costs that are systematically different from the

average costs of beneficiaries who are treated as similar by the risk adjuster. When

monthly payments are made on a fixed, prospective (or capitaled) basis, those

groups of enrollees are referred to as ‘‘risk pools.’’ If Medicare+Choice enrollees tend

to have lower costs than comparable fee-for-service beneficiaries, the result is known

as ‘‘favorable’’ risk selection. Conversely, ‘‘adverse’’ risk selection occurs when groups

or risk pools have costs that are higher than those of comparable fee-for-service

beneficiaries.

Risk selection is incompletely understood and imperfectly measured. It can arise

from many different sources. If unchecked, risk selection can destroy an insurance

system. Systematically selecting people who are healthier than average pays off

handsomely: the returns on favorable selection can overwhelm any potential savings

from operating an efficient system for managing care. Health insurance systems in

which biased selection segments the risk pool are said to enter a ‘‘death spiral’’ if

the problem is not fixed.

One goal of risk adjustment is to pay more fairly. In a fair system, the amounts

paid for different risk pools would closely approximate the average cost of providing

services to their members. Under that framework, a good risk adjuster would pay

groups with sicker, more expensive people proportionately more and groups with

healthier, less expensive beneficiaries proportionately less.

Medicare+Choice Risk Adjuster

There are a wide variety of potential approaches to mitigating the effects of risk

selection. HCFA has adopted a mechanism for risk adjustment that relies on impatient hospital admissions for specific diagnoses to trigger higher capitaled payments

in the following year. That mechanism, which is known as the principal in-patient/

diagnostic cost group (or PIP/DCG), attempts to adjust payments statistically to account for individuals with persistently high costs. On average, PIP/DCGs would reduce payments somewhat for most beneficiaries but increase them significantly for

the minority of beneficiaries who were hospitalized in the prior year for specific conditions (such as congestive heart failure).

HCFA has had to overcome significant analytical and operational obstacles in setting up the PIP/DCG system. The agency appears to be successfully implementing

that complex system, for which it deserves recognition. But it is important to understand the limitations of that system for adjusting payments.

Developing a Medicare Risk Adjuster

Although the PIP/DCG system is a significant improvement over demographic adjusters, it has had limited success in achieving the goal of ‘‘fair’’ payments—payments that are closely related to the costliness of beneficiaries (based on their

health status). Two factors contribute to the difficulty of developing an adequate

Medicare risk adjuster.

First, the health care costs for individuals are enormously difficult to predict.

That difficulty is compounded when the predictions are based on the administrative

data available from processing claims.

Second, Medicare spending is extremely skewed—that is, the sickest beneficiaries

are extraordinarily costly. The most expensive 5 percent of Medicare beneficiaries

cost almost as much as the remaining 95 percent of all Medicare beneficiaries. On

average, those in the top 5 percent cost over $70,000 annually—more than 10 times

the average annual cost for all Medicare beneficiaries.

29

The variation in cost per beneficiary has two critically important implications. On

the one hand, it highlights the potential financial consequences associated with both

risk selection and inadequate risk adjustment. On the other hand, assuming neutral

risk selection—that a risk pool has an ‘‘average’’ population—the skewness of the

distribution of costs may require relatively large numbers of participants for a risk

pool to be stable. Very large risk pools are unlikely to be undermined by having one

too many—or too few—million-dollar cases in a year. Small risk pools, however,

could be seriously disrupted by having just one person who incurs catastrophic

health care costs.

Large health plans may be able to assume full financial risk for their enrollees.

Even without risk selection, small plans may not be well positioned to assume full

financial risk. In many large Medicare+Choice markets, health plans base payments

to physicians or other providers on a percentage of premiums, thereby passing risk

on to the providers.

These compensation arrangements do not directly connect HCFA to provider payments. Yet HCFA remains vitally involved for two reasons. First, HCFA regulates

the terms and conditions under which physicians may be placed at substantial financial risk, approving their contracts with Medicare+Choice plans. Second, HCFA

has a vital interest in and regulatory responsibility for assuring that beneficiaries

have adequate access to sufficient providers and receive high-quality care.

The numerous Medicare+Choice providers who are paid on a capitaled, percentage-of-premium basis subdivide a health plan’s risk pool. As a result, even relatively

large risk pools at the health plan level may become too small at the provider level.

PIP/DCGs may not be a desirable system for adjusting payments to small risk pools.

Problems with Using an Inpatient Risk Adjuster

The first phase of the PIP/DCG relies solely on impatient hospital admissions and

excludes care delivered in other settings. One can argue that the reliance on impatient hospital admissions hurts managed care plans, many of which have reduced

their use of impatient hospital services. Some plans have implemented effective disease management and other protocols that may alter the pattern of care, possibly

minimizing the specific admissions that are rewarded by the PIP/DCG methodology.

What are the implications of the impatient PIP/DCG payment system for a

Medicare+Choice plan that has invested in developing sophisticated disease management systems for chronic conditions? Unlike acute episodes of care, chronic conditions, such as congestive heart failure, can frequently have high and recurring

costs. Paradoxically, that makes such conditions ideal for both disease management

interventions and for creating a PIP/DCG payment adjustment.

With chronic conditions, an HMO can identify who is at risk and develop intervention strategies to improve outcomes. Typically, successful interventions stress

prevention, investing in patients’ education, and gaining their compliance with protocols. Although such strategies do not ‘‘cure’’ chronic conditions, they improve patients’ outcomes and frequently save money by avoiding hospitalizations. Success in

avoiding hospitalizations, however, means that the Medicare+Choice payment rate

is never increased to compensate for the beneficiary with high-cost, chronic conditions. Without a hospitalization for congestive heart failure, for example, the PIP/

DCG system does not recognize that the beneficiary has the condition.

Is this ‘‘Catch 22’’ real? Preliminary findings from an analysis being conducted by

John Bertko, a principal in the actuarial consulting inn of Redden & Anders, provide some guidance. A highly sophisticated Medicare+Choice plan appears to have

implemented effective disease management protocols for several conditions, including congestive heart failure. By investing about $3,000 annually in each patient,

that HMO has apparently managed to avoid about half the expected hospital impatient admissions for congestive heart failure. Such an HMO could become the victim

of its own success in managing care. In cases in which a beneficiary with congestive

heart failure avoids hospitalization because of better medical management, for example, the HMO would forgo over $12,000 in higher PIP/DCG payments in the subsequent year if the system was fully phased in. Not only would the HMO’s success

in avoiding hospitalization preclude its receiving the higher revenues, but the plan

would also have incurred higher expenses to finance the disease management program.

These findings are preliminary. But even if the completed analysis confirms the

initial findings, it is unclear how many Medicare+Choice plans have the sophistication to implement comparable programs. It is also unclear how many conditions

would be susceptible to disease management interventions that avoided hospitalizations that trigger higher PIP/DCG payments. However, sophisticated disease management programs for conditions such as diabetes with complications or chronic obstructive pulmonary disease might generate similar ‘‘Catch 22s.’’

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Problems with Refining PIP/DCGs

The successful development of the second stage of PIP/DCG risk adjusters faces

formidable obstacles. Relying on hospital impatient data means that the data sets

are, compared with the total volume of Medicare claims, relatively manageable. Expanding the adjustment system to include outpatient procedures markedly increases

the number of claims to be analyzed. Including all Medicare services could further

increase the number of claims by an order of magnitude. Simply manipulating the

data will pose significant challenges.

Hospitals have long had strong incentives to precisely code impatient admissions,

making the claims and diagnostic information relatively reliable. HCFA may encounter significant problems with the reliability and validity of some of the data

that would be used in the second stage of PIP/DCGs. The accuracy of hospital outpatient data, for example, might prove problematic for use in the more comprehensive risk-adjustment system.

ALTERNATIVE APPROACHES TO RISK ADJUSTMENT

The discussion earlier in my testimony highlighted some of the problems associated with devising and improving an adequate mechanism for adjusting payments

for risk. HCFA and others have funded extensive research in efforts to develop viable mechanisms. The inability to devise more effective tools underscores how difficult the challenge actually is.

An alternative to using a statistical approach to adjust payments is to alter the

level of risk borne in the payment pool. Some payers, such as state Medicaid agencies, are using a variety of approaches that, in effect, adjust the risk pool, not the

payments.

Under fee-for-service, physicians and other providers can be viewed as revenue

centers: the more services they provide and bill, the more they get paid. That arrangement provides strong incentives to use more, rather than fewer, services. In

stark contrast, under capitaled payment arrangements, providers are cost centers:

their revenue is fixed, so that providing services adds only to costs, not to payments.

One explanation for the differing utilization patterns between fee-for-service and

(capitated) managed care is that providers are converted from ‘‘revenue centers’’ to

‘‘cost centers.’’

In a Health Affairs article, Joseph Newhouse and colleagues have argued in favor

of partial capitation. They raise concerns about stinting on needed care when a provider must bear 100 percent of the marginal cost of providing services. That concern

may be strongest where providers’ risk pools are too small to be stable or where providers are thinly capitalized.

Payment systems that combine attributes of fee-for-service and capitation create

incentives to avoid unnecessary services but not stint on needed care. Many such

approaches are possible.

I will describe four generic types of hybrid payment systems that combine some

capitation with additional payments as services or costs increase. Those approaches

are currently used in commercial markets, Medicaid, or Medicare demonstrations.

They all limit the amount of risk assumed by a risk pool by paying extra for highcost cases; that permits smaller risk pools to be more stable, lessening their volatility and susceptibility to big financial swings. To keep such systems budget neutral, the average capitation payments must be reduced by the amount being ‘‘carved

out’’ for separate payment.

First-Dollar Partial Capitation. HCFA is experimenting with partial capitation

payments in a demonstration project with an academic health center at the University of California at San Diego (UCSD). For impatient hospital services, HCFA pays

the UCSD health plan half of the Medicare fee-for-service payment plus a capitaled

amount. In part because of the reduced risk associated with this payment system,

UCSD chose to offer a managed care plan that permitted direct access to the specialists on its medical school faculty.

Condition-Specific Carve-Outs. Pregnancy, acquired immunodeficiency syndrome

(AIDS), solid organ transplants, and end-stage renal disease (ESRD) are all examples of disease or condition-specific carve-outs being employed by Medicaid agencies,

HMOs, or Medicare. Some Medicaid agencies remove AIDS or other high-cost conditions from their capitation rates. Others exclude pregnancy-related costs from their

normal capitaled payments. Instead, special payments are made for each case or

each delivery.

Such payment systems can easily be adjusted to promote specific objectives. For

example, if a goal was to promote prenatal care and limit caesarian deliveries, a

flat ‘‘bundled’’ payment could be made for all hospital and physician services. In conVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00033 Fmt 6633 Sfmt 6621 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
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trast, paying separate, higher rates for C-sections and lower rates for vaginal deliveries would instill fewer incentives to avoid C-sections.

For decades, Medicare has separated individuals with ESRD into a distinct risk

pool. Now, Medicare is experimenting with paying for ESRD beneficiaries on a

capitaled basis. Similarly, some HMOs carve out solid organ transplants from their

capitation payments to providers, retaining the risk (and payment responsibility) at

the plan level.

Individual (Specific) Stop-Loss Coverage. Many providers and health plans purchase private reinsurance to limit the costs of specific individuals or cases, which

is often referred to as ‘‘specific stop-loss’’ coverage. Coverage thresholds, known as

‘‘attachment points,’’ vary considerably. Some entities choose very high reinsurance

thresholds, seeking to handle only catastrophically expensive cases. Others choose

lower attachment points, seeking to reduce their financial exposure. The lower the

attachment point, the higher the reinsurance premium—the amount carved out of

the capitation rates—necessary to finance the costs.

Like the attachment points, the amount of excess costs reimbursed can also vary.

In some cases, reinsurance pays 50 percent of costs in excess of the first threshold

and 80 percent of costs above a second, higher threshold. Other policies pay I 00

percent of costs in excess of a threshold. By varying both the attachment point(s)

and the share of costs paid, specific stop-loss policies can significantly moderate

risk. At the extreme, certain stop-loss policies approach first-dollar partial capitation. (That occurs if the initial payment threshold is the first dollar.)

Aggregate Stop-Loss Coverage. Aggregate stop-loss coverage is also a commercially

available product. Typically, that coverage presupposes the existence of an underlying specific stop-loss policy. If the cost of services for all members of the risk pool

exceeded a specific level, the aggregate reinsurance policy could reimburse those excessive costs.

For example, assume that a physician has 300 capitaled Medicare beneficiaries

in his or her risk pool and buys both specific and aggregate reinsurance. Any costs

of physician services for an individual in excess of $7,500 would be paid by specific

reinsurance. None of the amounts above the attachment point would be counted

when calculating aggregate costs. However, all costs up to $7,500 would be included

in calculating whether aggregate reinsurance payments would be triggered. In this

example, two individuals might require extensive cardiac services and open-heart

surgery, generating physician fees in excess of $10,000 each. The specific reinsurance policy would pay the costs over $7,500 in each case. Assume further that the

average cost of physician services for each member of this physician’s Medicare risk

pool equals $1,800 (after excluding the catastrophic costs over the threshold) but

that the physician only averaged a capitation payment of $1,440 per patient per

year. Any costs averaging in excess of $1,728 per patient per year, which is 120 percent of the annual capitation payment, would qualify for aggregate reinsurance.

CONCLUSION

The success of Medicare+Choice is tied to how much, and how, Medicare pays.

Low rates of increase in payments will tend to cause health plans to withdraw from

or limit their presence in the Medicare+Choice market. Constrained payment rates

will make benefit offerings less attractive to consumers, which will further slow

growth in enrollment. Even though it is an improvement over the prior demographic

adjuster, the PIP/DCG is a flawed mechanism for adjusting for risk selection. HCFA

is working to develop an improved method for implementing stage two that would

take account of service use in all settings. Because of the difficulty in markedly improving mechanisms that adjust payments, however, the Congress may wish to consider other approaches that would limit the risk borne by a pool.

Mr. BILIRAKIS. Now, if HCFA is made aware of—and they have

been made aware of, because I know that we have been communicating back and forth—what the intent of the Congress is, and

was at that time, and still is, are they prepared to adjust their

thinking?

Mr. BERENSON. If there is a clear consensus in the Congress

about that now, I think now deciding that it should be budget neutral, then HCFA can—we can technically do it in a budget-neutral

way and would obviously follow the will of the Congress.

32

Again, I think there is some rewriting of history here about what

the original intent was, and we followed what we thought the bill

called for.

Mr. BILIRAKIS. So you are referring then to the piece of legislation that would clear that up; is that correct?

Mr. BERENSON. I think that’s right. And, again, we are also very

concerned about disruption to beneficiaries, about stability in the

program, and that’s why we carefully phased in risk adjustment

over a 5-year period. In the first year, only 10 percent of the payment is based on the risk adjustor. Those assumptions about savings or reductions in payment to the plans assume stable case

mix—that the plans won’t respond to the incentives of risk adjustment by attracting sicker patients.

I’m not sure that assumption really should hold, either. When I

drive to work, I hear ads all the time from hospitals about chest

pain centers and an ability to take care of people who have acute,

severe illnesses. With risk adjustment, one of the goals is for

health plans to develop expertise in cancer management and heart

management and to be able to change the case mix of their beneficiaries so that these kinds of impacts, in fact, won’t happen.

We phased it in over 5 years so that the plans would have an

opportunity to respond to the new program and be able to change

their program.

So we, I think, share with the Congress the concern about disruption, the concern about plans pulling out because of risk adjustment, and feel that the phase-in schedule we’ve come up with is

a response to that concern.

Mr. BILIRAKIS. Well, now, you were in the audience when Mr.

Bryant made a comment about hoping that HCFA was not basically using its risk adjustor concept to squeeze out

Medicare+Choice. You’ve heard that comment. How would you respond to that?

Mr. BERENSON. Again, we are approving right now—since the

program, the Medicare+Choice program, has come in last July, officially, when we put out the regulations, we’ve approved 41 either

new applicants or service area expansions. There are another 22

pending. We are very eager to promote the program. There is a private fee-for-service application in that we’re reviewing. And we’ve

tried to——

Mr. BILIRAKIS. So your answer is that you’re not doing this because you want to squeeze out Medicare+Choice?

Mr. BERENSON. That’s not our intent at all, and that’s why we’re

phasing in risk adjustment.

Mr. BILIRAKIS. Let me ask you, then—and my time is almost

up—you’ve estimated approximately $11 billion, I believe it is $11.2

billion, in savings as a result of the risk adjustment concept you’ve

put into place. Where would that savings go? I mean, what’s the

intent there?

Mr. BERENSON. That savings goes back to taxpayers, basically,

if——

Mr. BILIRAKIS. Where? Goes back to the Treasury?

Mr. BERENSON. Part A would go back to the trust fund, and I assume part B would go back to the Treasury.

33

But, again, I’m not sure that—I mean, that’s an impact analysis

assuming there is no change in the case mix and plans, and, again,

I would wonder whether that is, in fact, going to happen. I mean,

risk adjustment should produce the kinds of change such that that

doesn’t, in fact, occur.

Mr. BILIRAKIS. All right. Thank you.

Mr. Brown?

Mr. BROWN. Thank you, Mr. Chairman.

Dr. Berenson, thank you, again, for your patience and for joining

us.

It seems self-evident that managed care plans enroll healthierthan-average seniors. I mean, anecdotally it seems like it is true.

It seems like it is true when I go home and talk to people. And

from a business standpoint it seems like it should be true that

managed care companies want to attract the healthiest seniors, as

insurance companies would want to do. It’s good business practice.

Tell us about any evidence or studies that confirm the belief that

most of us, I think, hold that there is some sort of cream skimming

in the system like that.

Mr. BERENSON. Well, there have been a series of studies over the

years. The most comprehensive was Mathematica’s study, which

looked at favorable selection and determined slightly more than 10

percent favorable selection. In other words, we were overpaying the

plans by about 10 percent, or slightly more than that.

Now, that’s getting somewhat dated. That was in the early

1990’s. But there was a recent survey in 1996 of individuals, and

it asked them about their ADLs, their disabilities, and found that

beneficiaries in plans had lower levels of Activities of Daily Living

(ADLs) than those who were in fee-for-service, and it was based on

that information that PPRC made an estimate of overpayment to

plans.

I think the risk adjustor, itself, is the most recent evidence. The

risk adjustor determines whether favorable selection is taking

place. Again, using the current model for risk adjustment suggests

that there is favorable selection in plans such that they are getting

about 7 percent more than they would be if they had average selection.

So there are a series of studies, and, again, it is not surprising.

I’ve talked to medical directors of plans who basically say, ‘‘We do

not want to have the reputation of being the best AIDS program

around. We’d like to be second-or third-best. We don’t want to attract people who have those kinds of high-cost illnesses.’’

And so it is natural, and so with risk adjustment they get rewarded for attracting those people, rather than the other way

around.

Mr. BROWN. And so, in a sense, conversely, if the point of risk

adjustment, which I think is to ensure that plans get more money

for sicker seniors, then, conversely, plans get less money if they are

particularly good at cream skimming, correct?

Mr. BERENSON. Whether it is intentional cream skimming or it

is just that people who don’t have multiple medical problems are

more attracted to managed care, to HMOs, it could either be intentional or just how beneficiaries behave, but there should be an adjustment for that factor, and I think virtually everybody that is recVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
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ommending a competitive health system identifies the need for risk

adjustment to make the competition fair.

Mr. BROWN. Can we keep up in this institution? If the sophistication of the actuaries in an insurance company understand the sophisticated way of marketing and cream skimming, if you will,

Congress responds by good risk adjustor language to really try to

do managed care in the right way, pay more for sicker people, pay

less for the least-expensive, healthiest, youngest, perhaps most affluent Medicare beneficiaries, can we keep up? Can we—because

the next step after we pass good risk adjustor language is the sophistication of insurance companies will figure another way to sort

of keep ahead and ensure good business practice, assure and ensure the least-expensive people.

Is this sort of a treadmill that we’re on that we can’t quite keep

up with their pursuit of profits this way in for-profit medicine?

Mr. BERENSON. Well, risk adjustment can’t be the only answer.

I mean, most people agree that risk adjustment will never be able

to fully predict somebody’s risk, and that’s not our goal. There will

still need to be other routine oversight that we do of marketing materials that we do right now so that plans don’t really overtly abuse

their trust, essentially, to just market to healthy people.

I mean, the example that has been used for many years is to

offer an enrollment sign-up place on the third floor of a walk-up,

and so anybody who can make it up there gets to sign up. That

doesn’t essentially happen, but we have a responsibility——

Mr. BROWN. It’s not illegal, is it?

Mr. BERENSON. [continuing] to oversee the program so that that

kind of thing doesn’t happen.

Risk adjustment is one tool, but we have an obligation to also assure that other practices don’t go on.

Mr. BROWN. And you do that well?

Mr. BERENSON. We take it seriously and are improving our capabilities in that area.

Mr. BROWN. Do you do it well?

Mr. BERENSON. We do it well.

Mr. BROWN. Okay.

Mr. BILIRAKIS. Mr. Ganske?

Mr. GANSKE. Thank you, Mr. Chairman.

Dr. Berenson, I want to read to you from the summary from this

2-month-old GAO report. ‘‘Medicare+Choice reforms have reduced

but not likely eliminated excess plan payments,’’ and then elicit

your response.

It says, ‘‘Health plans have not, however, produced the expected

savings for the Medicare program. Until 1997, Medicare plans were

paid 95 percent of the expected fee-for-service cost for beneficiaries.

The 5 percent discount was established to allow the program to

benefit from the efficiencies commonly associated with managed

care. However, numerous studies conducted by us, the PPRC,

which has been incorporated into the Medicare Payment Advisory

Commission, HCFA, and others demonstrated that Medicare programs spent more on beneficiaries enrolled in health plans than it

would have if the same individuals had been in fee-for-service.

‘‘This unexpected result occurred because Medicare payments

were based on the estimated cost of fee-for-service beneficiaries in

35

average health and were not adequately adjusted to reflect the fact

that plans tended to enroll beneficiaries with better-than-average

health who had lower health care costs, a phenomenon known as

‘favorable selection.’ ’’

And this is the paragraph that I think is important and the subject of today’s hearing: ‘‘PBA’s new formula for paying health plans

implemented in 1998 takes steps to lower but probably does not

eliminate excess plan payments.

‘‘Among other changes, the new formula slows the growth of plan

payment rates relative to fee-for-service spending growth for 5

years. More importantly, BBA mandates the implementation of

health-based risk adjustment system intended to better match payments to beneficiaries’ expected health care costs and reduce the

excess payments caused by favorable selection.’’

This is important right here. ‘‘The effect of these changes is reduced, however, because BBA locked into place the excessive payment rates that existed in 1997. For example, when HCFA actuaries set 1997 payment rates, they based those rates on a forecast

of 1997 fee-for-service spending. The actuaries now know that those

rates were too high, because the forecast overestimated fee-forservice spending by 4.2 percent. However, BBA specified that 1997

rates be used as the basis for 1998 rates.

‘‘This implicit inclusion of the forecast error resulted in excess

payments of $1.3 billion in 1998. Furthermore, the annual excess

payments associated with the forecast error will increase each year

as more beneficiaries join health plans.’’

Would you comment on this summary? Do you think that this is

an accurate summary?

Mr. BERENSON. Yes, we think that is an accurate summary, and

I’ve spent a lot of time working to understand the AAHP’s argument about a ‘‘Fairness Gap’’ that we are under-paying the plans.

They’ve identified a number of areas where they think they are

being underpaid, and a significant piece of it is risk adjustment.

They’ve ignored in their analysis, really, that 4.2 percent.

When we do all the overpayments and the underpayments—and

I could go through it if you’re interested—we actually come out at

about 96 percent, is what we’re paying the plans, in fact, 1 percentage point more than the 95 percent, which we sort of understand,

going back 20 years. That is, in fact, the basis for the President’s

proposal on how the structured pricing, competitive pricing, is determined.

So we, in fact, did overpay the plans in 1997 and don’t have an

opportunity to recoup that because the BBA did not permit that,

and it is one of the items that goes into the overpayment category

and where ultimately we’re paying the plans about where we think

we should be paying the plans, in aggregate.

That doesn’t mean that there might not be a plan in a certain

geographic area, like Tennessee, that might be getting underpaid,

but in aggregate we think we’re pretty much where we are supposed to be.

Mr. GANSKE. I appreciate that.

Mr. BILIRAKIS. The gentleman’s time has expired.

Ms. Eshoo?

Ms. ESHOO. Thank you, Mr. Chairman.

36

Thank you, Dr. Berenson, for your testimony to the committee.

My question is about adequate payment. Adequate payment, obviously, can mean different things to different people. When

Medicare+Choice plans say ‘‘adequate payment,’’ it seems that they

mean compensation large enough to cover not only the Medicare

benefits package, but also supplemental benefits such as prescription drugs and zero co-pays.

Is that an accurate perception of adequate payment? If it’s not,

I’d really like you to correct it, but if you think it is——

Mr. BERENSON. I think that is one of the confusions in the discussion that people have about adequate payment.

The statute requires we make a payment to the plans based on

this complicated formula, and if the plans are able to provide the

services, the mandated Medicare Part A and Part B services, for

less than that payment, they’re able to provide additional—they’re

required to provide additional benefits, essentially, and that tends

to be prescription drugs, it tends to be at a zero premium in many,

many markets. It can be preventive medicine services, it can be

hearing aids. It can be a series of additional benefits.

And we’ve calculated that overall, again, on a national basis, that

as much—well, about $54 per member per month, or about 10 percent or so, of the payments that the plans receive are in this additional benefit category. They are actually able to provide the Medicare benefits and have 10 percent more to provide additional benefits. That’s what some beneficiaries are taking advantage of.

What we’ve observed with some of the pull-outs is that the plans

that pulled out, in fact, were offering additional benefits along

these lines and, for whatever reason, decided that they could not

cut back on those benefits and still attract beneficiaries, or maybe

there were other factors going on.

So when we talk about paying adequately, I think we are quite

confident that we pay adequately to provide the Medicare benefit

package. We’ve been paying more than that in many geographic

areas so that plans can provide additional benefits, and what is

happening is the plans really are not able—we’re finding plans are

not able to attract beneficiaries with other than very generous additional benefits. They’re not going there because the quality is better or because there is more emphasis on coordination and prevention. It really is relying on their ability to provide these additional

benefits.

Ms. ESHOO. Does HCFA have the ability to do any essentially

exit interviews?

Mr. BERENSON. That actually came up very recently in a discussion we had with MedPac. We’re looking into that and trying to see

if it does require OMB sign off, whether it is a formal survey or

not, but we and MedPac, I think, have determined that we would

like to understand the plans’ perception of why they are pulling

out. We would like to know the reasons, in a more structured way

than we have now, which is more anecdotal. We’d like to do that.

Ms. ESHOO. Thank you. I think that that could prove to be instructive, if you can get rid of some of the weeds around the administrative or how you actually implement that.

If you were to make a check list relative to Medicare+Choice and

the pluses and the minuses, on the plus side and the minus side

37

what would you list? Does one outweigh the other? Is this a worthy

experiment?

In some ways I think that we are being held hostage by the

groups coming in and saying—and I don’t know where the legitimacy of this lies. It is always easy to say that a federally funded

program is not paying enough to make it work, and so, you know,

we hear from our constituents. They come flying to us and saying,

‘‘This is an outrage that my insurance carrier is pulling out of the

market. Do something about it.’’

Is there a legitimacy to that? Is this working well? Did we fund

this fairly and adequately?

Of course, that’s pitched up against the large picture that I mentioned—the much larger picture that we are struggling with this

in the, you know, waning hours.

Mr. BERENSON. I’m not going to sort of give you a total answer,

sort of on the spur of the moment. Two things immediately come

to mind.

One, it is more than an experiment—17 percent of beneficiaries

are now getting their care——

Ms. ESHOO. How many have dropped out, out of that 17 percent?

How many have pulled out of the market?

Mr. BERENSON. How many beneficiaries have lost the plan?

Ms. ESHOO. Yes.

Mr. BERENSON. Well, last year it was about 400,000 and this

year a little over 300,000, so that’s 700,000. It’s about 10 percent,

or a little more than that, have been affected, although, again, as

the graph showed, more are in now than were in, even with the

pull-outs.

Ms. ESHOO. Yes.

Mr. BERENSON. So one is a serious program. Many beneficiaries

like the option of being in an HMO, and that should be provided

to them, and we hope that we’ll have other options like that.

On the other hand, what we’ve also learned from the pullouts is

that a beneficiary cannot be assured that their prescription drug

benefit or other additional benefits, but particularly prescription

drugs, will be there. It sort of depends on the vagaries of the market.

There’s about a third of the beneficiaries who do not have access

to a plan that offers prescription drugs in the first place, and we’ve

seen a number who are not able to stay in a plan because the plan

has pulled out, they’re not able to have easy access into a Medigap

plan that offers prescription drugs, so I think that points out, although it is an important, necessary program, Medicare+Choice, I

think having a prescription drug benefit in the basic Medicare benefit package will produce some equity in the program and not have

it be based on where somebody lives.

Ms. ESHOO. Yes. Thank you.

Mr. BILIRAKIS. The gentlelady’s time has expired.

Ms. ESHOO. Thank you.

Mr. BILIRAKIS. Mr. Bryant?

Mr. BRYANT. Thank you, Mr. Chairman.

Thank you, Dr. Berenson, for your testimony today.

Just to follow very quickly the comment from the gentlelady from

California about are we adequately funding health care, not only

38

in this area of the Medicare+Choice but in the fee-for-service, I

know providers in my District are complaining across the board

that we’re not paying enough.

Let me also say that, as you’ve mentioned, the vast majority of

Medicare+Choice enrollees, I think you’ve said that they aren’t affected, but you just indicated that some 700,000 enrollees over the

last 2 years of the 6 million people in the program have had their

coverage disrupted. Certainly, that is a significant problem in my

view, together with the fact that we’ve had 99 plan withdrawals

this year, which is, again, the same number from last year total,

two together of 99 years in a row [sic] that we’ve had withdrawals.

Dr. Berenson, I would like, if you would, to late file with your

testimony some answers to some questions.

Very quickly, you’ve mentioned the 41 new plans you’ve approved. I need to know, are these expansions in markets that already have plans? And how many of these are in counties that previously had no choice plans? And how many are plans that are new

to Medicare+Choice? And how many cover areas where there—well,

scratch that question there.

[The following information was received for the record:]

The 42 plan approvals since July 1998 are providing service in a total of 171 counties, including 46 counties that previously had no Medicare+Choice plan and 125

counties that already had a Medicare+Choice plan. Of the 42 approvals, 22 are new

Medicare+Choice contractors and 20 are current Medicare+Choice contractors that

have expanded their service areas.

One other question that, again, I’ll ask you to late file your answer on, is that on page 6 of your statement you note that you’ve

listed the—you’ve made a few changes in the program’s regulatory

framework, and I need to know, in your answers, how many of the

more than 800 pages of regulations did you retract, and did you

scale back from any of your 42 operational policy letters?

[The following information was received for the record:]

The June 26, 1998, Medicare+Choice (M+C) interim final rule implementing the

program consists of 148 pages, 51 pages of regulation text and 97 pages of ‘‘preamble’’ text explaining the legal and policy justifications for the regulation.

The February 17, 1999, ‘‘mini-rule’’ made important refinements to the original

regulation that increased protections for beneficiaries while minimizing the administrative workload for plans. For example, the new rule:

• clarifies that beneficiaries enrolled in a M+C plan that withdraws or is terminated from Medicare are entitled to enroll in other remaining, locally available

M+C plans;

• specifies that any changes in plan rules must be made by October 15 to ensure

beneficiaries have all the information they need to make an informed choice

during the November annual open enrollment period;

• waives the requirement for an initial health assessment within 90 days of enrollment for commecial health plan enrollees who remain in the same managed

care organization’s Medicare+Choice plan when they become eligible for Medicare at age 65, and for enrollees who switch plans but remain under the care

of the same primary care provider;

• allows plans to choose the form of the initial health assessment;

• stipulates that the coordination of care function can be performed by a range of

qualified health care professionals, and is not limited to primary care providers;

• limits the applicability of provider participation requirements to physicians rather

than all health care professionals; and,

• aligns requirements for terminating specialists with the process for other providers.

These refinements were based on public comments regarding the interim final

rule. We are committed to continuing open dialogue with all interested parties on

how to strengthen, streamline, and improve the Medicare+Choice program. We inVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00041 Fmt 6633 Sfmt 6621 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
39

tend to publish a comprehensive final rule with further refinements this fall. However, we have not and are not retracting regulations.

We have, in fact, now issued 100 operational policy letters, frequently in response

to requests for guidance from managed care plans and industry associations. These

letters are an effective and efficient way to make further refinements and communicate clear policy guidance to a wide variety of M+C stakeholders in a timely manner.

Mr. BRYANT. Now, Doctor, let me ask you, for your testimony

today, do physicians in the fee-for-service have to do the same

amount of quality reporting as they do in Medicare+Choice? And

what would be your answer there?

Mr. BERENSON. We’re very actively working with the PRO program. The focus initially is on hospitals, and we will be doing quality improvement projects very similar to what we’re asking the

health plans to do, and the physicians who are on staff at the hospitals will be involved with that.

We’ve also made a commitment, because beneficiary choice between plans and fee-for-service is so important, to put up the same

quality measures, the HEDIS indicators, that we have from plans.

We want to put up equivalent information about the fee-for-service

sector, as well.

In a couple of areas, plans do better than fee-for-service, and we

want the beneficiaries to see that to help them make their decisions.

So we are trying very hard to apply an equal yardstick here, to

have the same requirements on fee-for-service and

Medicare+Choice because there are quality problems in fee-forservice.

Mr. BRYANT. So as of now, though, the choice providers have to

report the quality reports more than the fee-for-service have to at

this point? You’re trying to——

Mr. BERENSON. That’s right. I would say yes. In our regulations

and the so-called ‘‘QISMC’’ requirements, we do have specific reporting requirements for plans. Yes.

Mr. BRYANT. Okay. On page 8 of your statement, you indicate

that you assume that people taking prescription drugs on average

are less healthy than others.

Ms. Moon, in her testimony—who will be on the second panel—

suggests this perhaps. And I would ask you that, if people are joining the Medicare+Choice plans for the prescription drug coverage,

perhaps they actually are sicker than you think. Would that be——

Mr. BERENSON. Well, I’ve actually seen some writing. I saw a

‘‘Consumer Reports’’ analysis that said that plans were providing

prescription drugs to get favorable selection. That made no sense

to me, because people with prescription drug needs actually may be

sicker.

What is happening, at the same time, is that a number of the

plans are reducing their drug caps down to a very low level, so that

the sickest of the Medicare beneficiaries would not get a lot of benefit.

But I agree with the thrust of your question, that, in fact, prescription drugs do not favorably select.

Mr. BRYANT. Thank you.

Mr. BILIRAKIS. The gentleman’s time has expired.

Mr. Deutsch?

40

Mr. DEUTSCH. Thank you, Mr. Chairman.

I have a couple of questions specifically related to south Florida,

if you can answer them. I mean, they’re general enough that hopefully you can.

In Dade and Broward Counties, increases for Medicare+Choice

payments have been held to 2 percent per year for the last 2 years.

Does this increase bear any relationship to the cost of providing

health care in south Florida?

Mr. BERENSON. I am quite confident that the plans in Dade

County—which is one of the highest payment counties in the country—are able to provide the Medicare benefits for substantially less

than the payment.

The GAO, in one of their very recent reports, looked at Los Angeles County, which is similar in many ways to Dade County, and

found that the plans in L.A. County were providing the statutory

benefits at 79 percent of the payments. I don’t have a specific number for Dade County.

But I also would point out that, of the new plans that we are reviewing and are pending, we have already approved two new plans

in Dade and Broward County, and there are two more who have

applied to go into Dade and Broward County, so, to the extent that

they view the reimbursement levels as a problem, I don’t think

they’d be going in.

At some point, 2 percent year after year would start to become

a problem, but at this point, you know, the competition is very active in Dade County and the beneficiaries are getting substantial

additional benefits.

Mr. DEUTSCH. All right. Let me just mention this Dade and

Broward. I mean, there’s many beneficiaries in Broward, maybe

even more than Dade, as well.

I guess one of the things related to your sort of answer, the overall increases of health care—which I guess are over or about 5 percent at this point, so, in terms of what the plans are paying for the

services that they’re getting, you would assume that those services

are close to that average cost of 5 percent, so their reimbursement

is going up at 2 percent. By definition, are we then saying that the

benefits that they are going to be able to provide are going to be

decreased? Is that the policy decision that effectively we’re making?

Mr. BERENSON. Well, obviously, the plans have a lot to say about

it. If they are able to provide the services at less than 5 percent,

they’d be able to be in a better situation.

On the discussion of whether fee-for-service payments and our

payments should somehow bear a relationship to each other, I

would simply point out that it is often in areas where fee-for-service Medicare is at the highest, which have over-capacity or other

reasons, where plans do pretty well. They are able to negotiate better contracts, get better discounts, be able to do very useful utilization management precisely in the areas where Medicare fee-forservice costs are high. So I would hope that there are some things

that are new. Prescription drug costs are going up and the plans

haven’t really gotten a hold of those costs, but the whole goal of

providing the 5 percent discount off of fee-for-service to the plans

and the hope for managed care is that they would be able to provide services at a lower cost than fee-for-service.

41

Now, obviously, if they can’t and they’re only getting 2 percent,

at some point those lines cross and the plans can’t provide the additional benefits.

Mr. DEUTSCH. I just want to follow up on a couple of things

you’ve mentioned regarding prescription drugs.

Obviously, traditional Medicare doesn’t provide prescription

drugs, so you mentioned the figure of two-thirds of the plans providing some type of prescription drug coverage for Medicare HMO

beneficiaries. I mean, would you view it as a good thing if they

didn’t provide it?

Mr. BERENSON. In the plan, we put a basic prescription drug benefit into the basic benefit package that the plans—we pass through

the subsidy to the plans, and they are able to provide prescription

drugs——

Mr. DEUTSCH. Right, but let’s—you and I are both optimistic that

something like that is going to pass. Let’s say it doesn’t pass. We’re

still in the world we are today, where normal fee-for-service Medicare doesn’t provide prescriptions.

I guess I’m just trying to get a sense from the policy perspective

what you are articulating. It talks of 79 percent, 85 percent, whatever percent, 90 percent of providing the traditional coverage that

Medicare covered, and for that additional money that they have,

hopefully in some markets they are competing with each other for

clients.

I mean, I’m trying to get a sense from you. Is it a good thing that

they’re cutting back on benefits? Are you looking to basically manipulate the reimbursement level, where it is closer to what it

should be costing them to provide traditional, or isn’t that the

whole point of an incentive—to get them in the plan, so that theoretically it does save Medicare money, as well, it saves the Federal

Government and provides additional service at the same time?

Mr. BERENSON. I get your point.

Mr. BILIRAKIS. Be brief with your response please.

Mr. BERENSON. Basically, the plans are providing prescription

drugs. They are not cutting back their commitment to providing

prescription drugs. They are reducing some of the caps, changing

formularies, doing some things to make it manageable. That’s in

response to cost pressures.

It is better that they are staying in the program providing somewhat reduced benefits than the plans that are pulling out and really giving beneficiaries no choice.

Mr. BILIRAKIS. Mr. Burr to inquire.

Mr. BURR. Thank you, Mr. Chairman.

Welcome, Doctor. Let me ask you, why did 700,000 people over

the last 2 years drop out of Medicare+Choice?

Mr. BERENSON. Well, it’s the plans that dropped out, leaving

700,000 beneficiaries without their plan, so it is—the plans actually—the beneficiaries, over half of them, went back into a plan

where they had an option to, so——

Mr. BURR. Let me read you the testimony in the Senate from the

director of CBO in June. He said, ‘‘Having well-established plans

vote with their feet and withdraw from their key Medicare+Choice

markets is an indication that payment and other conditions of participating in Medicare+Choice may be too stringent.’’

42

Do you agree or disagree with that?

Mr. BERENSON. They are obviously making business decisions,

and in some cases they related——

Mr. BURR. Do you believe what the CBO’s conclusion was, that

the reimbursements or the policies are too stringent?

Mr. BERENSON. No. I mean, I think the aggregate payment level

for the M+C plans is adequate. There are some geographic areas

where probably it is not adequate, and I don’t believe that the regulatory structure is overly burdensome.

Mr. BURR. Is the fact that, even with these hurdles in the way,

that seniors are striving to go to Medicare+Choice, what does that

say about traditional Medicare? Does it meet their needs?

Mr. BERENSON. Many beneficiaries see a positive value in

Medicare+Choice because of the additional benefits, and that’s why

we want to modernize the benefit package for traditional Medicare.

Mr. BURR. Would HCFA like to see 100 percent of the beneficiaries in the Medicare+Choice plan?

Mr. BERENSON. I think we want to create a level playing field so

beneficiaries can pick the approach that is most appropriate for

them. Some like managed care a lot. Others feel much more comfortable with the freedom of choice in traditional Medicare, and we

want to make it possible for them to have that choice.

Mr. BURR. What is that choice in traditional Medicare?

Mr. BERENSON. The choice in traditional Medicare is to be able

to go to essentially any doctor or any hospital without some of what

managed care brings with it, whether you like it or—there’s more

coordination, there’s more direction, there’s more selection of providers in managed care. In traditional Medicare we have a much

broader——

Mr. BURR. But less in the way of coverage?

Mr. BERENSON. Less in the way of coverage.

Mr. BURR. Less in the way of coverage.

Let me ask you about your comment about structured, competitive pricing. Can you tell me what that is? What is structured competitive pricing?

Mr. BERENSON. I don’t remember the specific reference, but I

think I was referring to the President’s plan.

Mr. BURR. You were talking about the President’s plan. Yes.

Mr. BERENSON. Basically, under the President’s plan, the plans—

instead of having the system that we have right now, which is

based on a complex formula that results in payment levels in Tennessee that I think make it very difficult for a plan to stay in, we

would have the plans determine, in relationship to the fee-for-service payments that Medicare makes, what the plan’s price is, and

the plan gets that price. The plans get it either from the government or from the beneficiary.

To the extent that they are able to provide those services at a

lower cost, they are able to give rebates to beneficiaries and attract

those beneficiaries who then are in a position to either keep the

savings or to purchase additional benefits.

Mr. BURR. Are you familiar with the Progress Policy Institute?

Mr. BERENSON. Progressive Policy Institute?

Mr. BURR. Progressive Policy Institute. Let me read you their

quote on the President’s plan. ‘‘The President’s proposal of MediVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00045 Fmt 6633 Sfmt 6602 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
43

care spending would continue to be determined by the cost of traditional fee-for-service plan, which is determined by the prices Congress sets for payments to providers.’’

Is that accurate?

Mr. BERENSON. That’s part of how the traditional fee-for-service

total payments are——

Mr. BURR. We determine what price we’re going to reimburse,

and, consequently, you use that as a gauge to determine what the

reimbursement of Medicare+Choice is, right?

Mr. BERENSON. No. Under the new proposal, the plans would determine, and if, in fact, we’re paying too much or paying inappropriately, they would be in a position to charge a lower price to the

beneficiary.

Mr. BURR. Let me ask you about the benefits in the President’s

proposal, since you brought it up.

If a beneficiary in the first year had $2,000 worth of annual drug

costs, anything over the $2,000, who would be responsible to pick

that up?

Mr. BERENSON. The beneficiary would.

Mr. BURR. There’s no stop-loss for the beneficiary?

Mr. BERENSON. There is no stop loss. What the beneficiary benefits from is the discounts that the PBM is able to——

Mr. BURR. Is there any other health insurance policy out there

today where you would pay for an annual premium where, when

you got to a certain amount, you, as the beneficiary, were responsible for 100 percent of it?

Mr. BILIRAKIS. A brief response please, Mr. Berenson.

Mr. BERENSON. I honestly don’t know.

Mr. BURR. Let me just read in closing, Mr. Chairman, just one

statement again from the Progressive Policy Institute.

‘‘The President’s proposal advances the debate, but it also could

be improved in several areas. It would inject strong competitive

forces in Medicare, but it fails to capture the potential savings on

behalf of taxpayers. It adds a drug benefit, but in a way that is

poorly targeted to help those most in need. It contains some helpful

limits on Medicare spending, but its cost containment is not sufficient to cover the cost of new drug benefits, let alone reduce Medicare spending for the long run. It would prolong the solvency of

Medicare, but only through accounting gimmicks which could actually delay more-aggressive action to restrain long-run cost.’’

I yield back.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Green to inquire.

Mr. GREEN. Thank you, Mr. Chairman.

Let me follow up with that. The President’s plan on prescription

medicine, granted, may not go as far, but I also don’t agree always

with what that institute says.

Dr. Berenson, let me revisit a little bit what Dr. Ganske was

talking about with the difference in data that AAHP is talking

about.

You said that HCFA estimates that plans are getting paid 96

percent of the fee-for-service rates, not the 82 percent that the Association or the HMOs are saying?

Mr. BERENSON. Yes.

44

Mr. GREEN. Okay. And this is because of a mistake in the Balanced Budget Act base rate for payment plans which are resulting

in overpayments to the plans?

Mr. BERENSON. Well, that represents 4.2 percent of an overpayment. I think a fundamental disagreement we have with AAHP—

and they’ll be up next—is that we think risk adjustment is a fair

adjustment and they use that as a deduction from their fee-forservice equivalent payment. We think it is an appropriate modification because of healthier selection. So we have a disagreement

there.

We do view a 4.2 percent overpayment that I don’t think has

been in their calculations.

We agree that the BBA did reduce 2.8 percent of—each year

there is a reduction. And I think we have a disagreement over the

GME carve-out as to whether that should be viewed as a reduction

to the plans or not. We actually make those payments to the teaching hospitals.

So we do have some disagreements on interpretation of the data.

Mr. GREEN. In the Balanced Budget Act, wasn’t the HMO payment deleted from or de-linked from the fee-for-service rate?

Mr. BERENSON. That was, I thought, one of the goals.

Again, I would point out that the withdrawals that are occurring

this year are tending to take place in lower payment areas, not the

higher payment areas that is part of the analysis, and again there

is, in my view, not a connection between what we would pay feefor-service and what we would pay plans, because plans are often

in the best position to save costs in high-payment areas and in a

relatively weak position, say, in some rural areas where there are

few doctors and one hospital. They’re not in as good a position to

get discounts.

So the link to fee-for-service is one that I think the BBA tried

to limit and de-linking makes some sense.

Now, in the President’s plan, however, we want to preserve what

the blend in the floor county payment increases have to the low

payment areas and recognize that the plans need to compete in a

geographic area.

So we, in fact, provide an opportunity for plans to compete with

an equivalent fee-for-service payment level.

Mr. GREEN. It seems like, again, under the BBA—and I know

there were lots of questions that I have in things that were done

in 1997 that maybe we wouldn’t do today because of our economy,

but HMOs are supposed to save Medicare money by managing care

better, so it seems like wouldn’t it be logical that the payments be

less than the average fee-for-service beneficiary in a geographic

area?

Mr. BERENSON. There still is a 5 percent reduction which is supposed to be for managed care efficiencies.

You know, I partly don’t know how to react to some of the plans

I’ve met with who say, ‘‘Our costs are going up 6 or 8 percent,’’ as

if that means we should pass through that 6 or 8 percent because

their costs are going up 6 or 8 percent.

The promise of managed care is that they can actually hold costs

down, and so I don’t think we should be in a position where we are

simply passing through the cost increases.

45

I think it is difficult at this point for plans. They’re raising premiums in the commercial side 10 percent or so. They are withdrawing from FEHBP. This is not a Medicare only problem, at all.

Plans are having difficulties at this point managing costs, and I

think that should be generally recognized.

Mr. GREEN. Lots of other reasons go into it other than reimbursement. For example, maybe you didn’t sign up enough enrollees to

really make an HMO possible, whether it be a rural area predominantly or even an urban, and we see a lot of volatility in the market where plans are merging with other plans and everything else.

Mr. Chairman, let me just follow up on the question that one of

our colleagues asked about the quality control requirements for

HMOs——

Mr. BILIRAKIS. Make it brief, please.

Mr. GREEN. [continuing] and not fee-for-service, and if Dr.

Berenson can talk about it.

Over the next few years Balanced Budget Act, seniors, and

HMOs will no longer have the freedom to go back to fee-for-service,

so there is quality control on HMOs and not fee-for-service, simply

because fee-for-service you can always go down the street to another doctor or different hospital or something like that, whereas

with HMOs shortly there will not be that ability for seniors to shop

around. Is that correct?

Mr. BERENSON. That is correct, and I think there is concern

about a plan that is capitated that has to work within a capitated

budget about whether they are, in fact, taking shortcuts.

Having said that, we do want to provide beneficiaries information about fee-for-service. They should know how hospitals compare

to each other with some objective data. Ideally we’d even get that

information about physicians.

So we are committed to doing that. We would agree with your

point about it being especially important for locked-in beneficiaries

before they make that kind of a decision, they really should have

some quality information.

Mr. GREEN. Thank you.

Thank you, Mr. Chairman, for understanding.

Mr. BILIRAKIS. Mr. Barrett to inquire.

Mr. BARRETT. Thank you, Mr. Chairman.

Dr. Berenson, you said in your testimony that there is considerable evidence that we have overpaid and continue to overpay plans.

The GAO study or your analysis, is that across the board, or are

there different degrees of error in different parts of the country?

Mr. BERENSON. Well, the BBA attempted to sort of decrease the

disparity. I guess it was Dr. Ganske who pointed out that in Iowa

we pay much less than we pay——

Mr. BARRETT. I understand. My question——

Mr. BERENSON. [continuing] in Florida.

Mr. BARRETT. My question is, Has the GAO or has your analysis

shown that that overpayment is different in different areas?

Mr. BERENSON. The GAO focused in on L.A. County and emphasized a high payment area and actually quantified what the difference was. I think it is clear that the areas that are limited to

a 2 percent increase at this point probably are in a better financial

situation than the low-payment areas.

46

Unfortunately, however, many of the pullouts this year were in

areas where the plans got 8 or 10 or 12 percent increases, which

was the intent of the blend in the BBA, and we have to assume

that the pull-outs were for other reasons because the payment levels were beginning to get to a reasonable level.

Mr. BARRETT. So evidence has shown this year that the withdrawals are occurring more often in what have historically been

the low-payment areas?

Mr. BERENSON. That’s right. Essentially, the plans who have a—

in fact, I have some data here. For plans who have a per capita

payment between $450 and $500, which is a low-end payment

level, 12 percent of the enrollees lost their plan. For plans that had

greater than $600 of payment as a result of the formula, only 1.3

percent of enrollees lost their plan.

So it was clear that the withdrawals tended to occur in low-payment areas, which is what one would probably expect.

Mr. BARRETT. So when I see the headline that says that the GAO

report says that these plans are still over-paid, I should infer that

they are talking about in higher reimbursement areas?

Mr. BERENSON. I think in aggregate.

Mr. BARRETT. I live in a District that says they are under-paid,

so when I come to my HMOs and say, ‘‘Don’t worry. In the aggregate you are overpaid,’’ they say, ‘‘Well, the aggregate——’’

Mr. BERENSON. I understand.

Mr. BARRETT. ‘‘Don’t talk to me about that.’’ So I’m still not getting what I consider to be an adequate answer.

If we have a problem in lower-paid areas where HMOs continue

to drop out, we have a two-tired health care system in

Medicare+Choice, don’t we?

Mr. BERENSON. Yes, and that’s why, again, I think we need a reform there, and why a competitive model—competitive pricing—

would be better than thinking you can get a national formula to

work well in every county or in every district, which I think is a

real problem.

Under the President’s proposal, the plans will determine what

their costs are, and that’s what they’re going to get paid. They’re

not going to get paid based on an arbitrary formula. As well-intentioned as the formula is, and it has accomplished a number of

things by bringing up the low-payment areas, it can’t get it right

in every area.

Mr. BARRETT. I don’t represent North Dakota, but let’s talk about

North Dakota for a second. My understanding is that there is really little HMO penetration there. How is it going to work in North

Dakota?

Mr. BERENSON. Well, first, in North Dakota, the basic problem—

we’ve raised the floor for—I assume the counties in North Dakota

are now protected by the new floor payment. The difficulty of getting managed care into a very rural area relates to factors other

than the absolute payment rate. The plans have to get a network,

and often they have to contract with what may be a sole community hospital with a limited number of physicians or nurse practitioners, and they really don’t have the negotiating ability or relationships with those providers to accomplish that network.

47

I think there are factors like that which are really more related

to the ability of HMOs to get into rural areas than to the payment

levels.

Mr. BARRETT. Let’s talk about the demonstration projects. How

are the demonstration projects going?

Mr. BERENSON. Well, we have an important—the BBA set up an

important competitive pricing demonstration. The Competitive

Pricing Advisory Committee selected two sites. We’ve worked with

the local advisory committee and have extended the start date to

January 1 of 2001.

The problem now is that there is at least some Congressional interest in exempting Kansas City and Phoenix as demonstration

sites, and, if that happened, I think it would be very hard for us

to proceed with the demonstration.

This is exactly the kind of demonstration we need to have to

know how an alternative to the current administered pricing model

would work, and we really think it needs to go forward.

Mr. BARRETT. And why is there opposition to that?

Mr. BERENSON. Well, everybody is for competition until it is in

their own backyard, that is what I assume.

The Competitive Pricing Committee spent a lot of time and carefully selected those sites. Many of the members of the advisory

committee think these demonstrations should go forward, but obviously some think it is better if the demonstrations are somewhere

else.

I think that’s an issue here.

Mr. BILIRAKIS. The gentleman’s time has expired.

Mr. BILIRAKIS. All right. I think that probably takes care of the

inquiries.

Dr. Berenson, as per usual, we would ask you if you would be

amenable to getting written questions and responding in a timely

fashion.

We are very grateful you have taken time to be here. Thank you,

again, for your patience.

Mr. BERENSON. My pleasure. Thank you.

Mr. BILIRAKIS. The second panel will please come forward: Ms.

Karen Ignagni, president and chief executive officer of the American Association of Health Plans; Mr. John Powell, vice president

of government relations for the Seniors Coalition; Ms. Esther

Canja, president-elect of the American Association of Retired Persons; Dr. Marilyn Moon, senior fellow with The Urban Institute;

and Rabbi Morton Malavsky from Hollywood, Florida.

Welcome, ladies and gentlemen. As you may know, your written

testimony is made a part of the record, and we will turn the clock

to 5 minutes for your vocal testimony, which I would hope would

complement or supplement your written testimony.

Ms. Ignagni, we’ll start with you.

48

STATEMENTS OF KAREN IGNAGNI, PRESIDENT AND CHIEF EXECUTIVE OFFICER, AMERICAN ASSOCIATION OF HEALTH

PLANS; JOHN POWELL, VICE PRESIDENT OF GOVERNMENT

RELATIONS, THE SENIORS COALITION; ESTHER CANJA,

PRESIDENT-ELECT, AMERICAN ASSOCIATION OF RETIRED

PERSONS; MARILYN MOON, SENIOR FELLOW, THE URBAN INSTITUTE; AND RABBI MORTON MALAVSKY

Ms. IGNAGNI. Thank you, Mr. Chairman, members of the subcommittee, we’re delighted to have this opportunity to testify this

morning.

I’d ask that my full statement be submitted to the record.

Mr. BILIRAKIS. It is a part of the record.

Ms. IGNAGNI. Thank you very much, sir.

I’d like to make six points this morning. I know that you are

being asked to evaluate this issue at a time when we are having

a very heated debate surrounding managed care, and, wherever

you stand on this political question, we hope that you will keep an

open mind on Medicare and how much, in particular, beneficiaries

stand to lose if they lose their choice.

We are in crisis in this program and we are at a crossroads.

What you do this year will determine whether the Medicare beneficiaries continue to have the choice of purchasing affordable comprehensive alternatives to traditional Medicare. Behind all the

numbers and all the rhetoric, that’s what is at risk.

Our beneficiaries are getting older. They don’t go back to fee-forservice. We have a very high proportion of poor and near-poor individuals. For them, if you end Medicare+Choice it means

unaffordable Medicare.

There has been a great deal of discussion about the impact of the

400,000 individuals affected by withdrawals last October 1, in addition to the 327,000 that will be affected beginning next year.

I don’t want to add to that discussion, since it has been very well

treated thus far, but I do hope that you will understand and really

will give emphasis to the fact that we are at a net reduction.

The idea that everything is fine and that we don’t have to act

this year couldn’t be further from the truth. The new approvals are

generally in existing areas or in service area expansions. Fewer

beneficiaries now have more than a choice of one plan versus where

we were simply last year, and we’ve endeavored through our numbers—and I know there has been a great deal of discussion about

that this morning—to provide a comprehensive picture of what is

occurring and why.

Mr. Brown, you made the point early in your opening statement

that you would like more briefing, and we would be delighted to

do that. My staff briefed the minority and the majority staff of this

committee prior to Memorial Day. We have had three briefings

with HCFA, numerous phone calls back and forth with HCFA.

We’ve briefed CBO. We’ve briefed the White House. We’ve briefed

Medpac on numerous occasions and we’d be happy to come back.

You’ve had quite a great deal of discussion about this infamous

4 percent. We have, in the numbers before you, included the 4 percent, so all of the estimates that we are talking about in our numbers include the 4 percent.

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My staff was at HCFA last week having a discussion with all of

their technical folks looking over the numbers, trying to understand what the real impact was across the country. We were asked

this question. We were very, very clear that the numbers before

you include the 4 percent.

Now, we don’t agree with the 4 percent assumption, but I remember very clearly several months ago sitting before the administrator and telling her that we understood this was going to be a

great matter of controversy. We wanted our numbers to be helpful,

to be useful, and we didn’t want that to be a distraction. So we

would be pleased to work with anyone on this committee to get

their hands around what the impact is in this endeavor in this

area.

And I’d also like to go to the matter that has been the subject

of much discussion about whether or not plans are making routine

business decisions here or whether we really are in crisis.

Remember that payment and regulatory decisions dictate the environment that health plans operate in, and any efforts to suggest

that these are not responsible for the current crisis is really aimed

at diverting attention from it.

There has been a suggestion that there is a 5 percent growth factor. I think one could construe that remark as if to say that most

plans in most areas would receive a 5 percent growth, and we know

what is going on in the area of inflation.

In fact, 78 percent of Medicare+Choice beneficiaries live in areas

where the rate of increase would be under 4 percent. A full 38 percent live in areas—many of yours on this committee—where the increase would be under 2 percent.

So with fee-for-service rising an average rate of 5.8 percent,

when you look at the compounding effects of two and two, and anywhere between two and four, and where you see most of the beneficiaries are living, you can see why we have termed this a ‘‘fairness gap.’’ We are urging you to pass the legislation before you,

H.R. 2419. While it will not solve the entire program and problem,

it begins to stabilize the situation. In many of your areas, the percent of government contributions to Medicare+Choice relative to

fee-for-service will decline below 80 percent. You can’t run a program that way. You can’t possibly fulfill the promises that you

have made to beneficiaries, and I urge you to look very carefully

at that.

I also urge you to reexamine the entire regulatory environment.

Before me, I have these regulations that came out, the mini reg

and the operational policy letters. This is all in the last year. Here

are our comments. We’ve commented on everything. There is virtually an operational policy letter every week.

In every one of our comments, we have not once taken issue with

patient protection matters. We have taken serious issue with administrative issues.

I would conclude, Mr. Chairman—and there is so much to say—

I would conclude by saying the following. There are three factors

that plans report are problematic in proceeding forward in this program, and I hope that you will take a very serious look at them.

The first is a relationship between Medicare+Choice payments and

fee-for-service payments, and there is a problem.

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The second is the broad regulatory environment. We no longer

have a level playing field. Our providers are telling us daily that

the amount of regulation here simply makes it impossible for them

to continue to participate in this program relative to the traditional

program.

And, finally, we find that many of our plans around the country

are raising the very serious issue that I think will be a major topic

for discussion in this committee about the wisdom of continuing on

a path where, in fact, the regulator is the competitor.

We have a serious issue with that. There are very good people

over at HCFA. We work with them very closely, despite our disagreements on many of the technical issues we’re here to talk to

you today. But the fact is you can’t run a railroad this way, and

the beneficiaries stand to lose a great deal.

I hope that won’t happen, and we would like to work with you

on a bipartisan basis to fix it, to address it. We think the window

is now, and if you don’t act this year we look forward to far more

beneficiaries being affected, and no one wants that.

Thank you, Mr. Chairman.

[The prepared statement of Karen Ignagni follows:]

PREPARED STATEMENT OF KAREN IGNAGNI, PRESIDENT AND CEO, AMERICAN

ASSOCIATION OF HEALTH PLANS

I. INTRODUCTION

The members of the American Association of Health Plans (AAHP) appreciate the

opportunity to submit testimony to assist in the Subcommittee’s evaluation of the

Medicare+Choice program. AAHP represents more than 1,000 HMOs, PPOs, and

similar network health plans; our membership includes the majority of

Medicare+Choice organizations, which collectively serve more than 75 percent of

beneficiaries in the Medicare+Choice program. Together, AAHP member plans provide care for more than 150 million Americans nationwide and have strongly supported efforts to modernize Medicare and give beneficiaries the same health care

choices that are available to working Americans.

Our plans have had a longstanding commitment to Medicare and to the mission

of providing high-quality, comprehensive, cost-effective services to beneficiaries.

Today, more than 17 percent—or 6.2 million beneficiaries—are enrolled in health

plans, up from only six percent just five years ago. Recent research indicates that

health plans are attracting an increasing number of older Medicare beneficiaries,

and that Medicare beneficiaries are remaining in health plans longer. In addition,

near-poor Medicare beneficiaries are more likely to enroll in health plans than higher-income beneficiaries. These health plans offer Medicare beneficiaries many benefits that are not covered under fee-for-service Medicare, such as full year’s hospitalization, lower copayments and deductibles, and prescription drug coverage (Figure 1).

Medicare+Choice Fee-for-Service

Outpatient Prescription Drug Coverage ................................................................................... Yes No

Deductible for Physician Visits ............................................................................................... No Yes

Nominal Copayment for Physician Visit .................................................................................. Yes No

Hospital Inpatient Cost-Sharing .............................................................................................. Typically, No Yes

Annual Day Limit on Hospital Coverage ................................................................................. Typically, No Yes

With passage of the Balanced Budget Act (BBA) two years ago, Congress took significant steps toward the goal of providing Medicare beneficiaries with expanded

coverage choices similar to those available in the private sector and toward ensuring

the solvency of the Medicare trust fund. The establishment of the Medicare+Choice

program was supported by AAHP and regarded as the foundation for moving forward with a program design that can be sustained for future generations of Medicare beneficiaries. Unanticipated events, however, have endangered this foundation

and created structural issues that must be resolved quickly.

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1 In responding to the survey, plans were asked to provide information on the benefit arrangement that presently applies to the largest share of their Medicare+Choice enrollees. Plans were

asked to describe the 1999 benefit, any change in the benefit to become effective on January

1, 2000, and the number of enrollees covered under the benefit. Using this information, Peter

D. Hart Research estimated the number of enrollees affected by benefit changes and the magnitude of these changes among the subset of enrollees covered by the most common benefit arrangement. Not all companies responded to each question.

II. CURRENT STATE OF THE MEDICARE+CHOICE PROGRAM

As members of the Subcommittee know, the first public sign of trouble in the

Medicare+Choice program surfaced last fall when nearly one hundred health plans

were forced to reduce or end their participation in the program, resulting in more

than 400,000 beneficiaries losing their health plan choice. Fifty thousand of these

beneficiaries were left with no other health plan option. At that time, AAHP and

others urged the Administration and Congress to make mid-course corrections, arguing that if program problems were left unaddressed, more health plans, many of

which have participated in the program for years, would face the same difficult decisions in 1999 and beyond. The unfortunate reality is that we were right. Just two

weeks ago, the Health Care Financing Administration (HCFA) announced that

327,000 beneficiaries in another ninety-nine health plans would lose their health

plan on January 1, 2000. Of the 327,000 affected beneficiaries, 70,000 will have no

choice but to return to the fee-for-service program because there is no other

Medicare+Choice plan in their area.

In addition to these sobering events, an AAHP survey of its 26 largest members

that participate in the Medicare+Choice program showed that among responding organizations, a substantial number of beneficiaries who will be able keep their plan

next year will face increased out-of-pocket costs and reductions in benefit levels.

Survey results, which were independently collected and tabulated by Peter D. Hart

Research for AAHP, showed that premium changes to be instituted by 18 companies

will affect nearly 1.5 million of the 3.86 million beneficiaries covered by the survey

whose plans will remain in the program next year. Among these individuals, monthly premiums will increase by $20 or more for 926,009 persons and $40 or more for

400,757 of the 926,009 persons. Monthly premiums will decrease for just fewer than

12,000 individuals; in all instances, these decreases will be less than $20. More than

1.3 million enrollees will face an increase in prescription drug copayments, while

just 10,000 enrollees will have decreased prescription drug copayments next year.

Additionally, about 600,000 individuals covered by the survey will face hospital inpatient copayments averaging $275 next year.1

III. SOURCES OF MEDICARE+CHOICE PROGRAM INSTABILITY

The health plans that announced their decisions to leave the Medicare+Choice

program or to reduce benefits did not make their decisions lightly. Many of these

plans worked up to the July 1st deadline to devise strategies that would enable

them to maintain their current service area, to stay in the program next year, or

to minimize benefit reductions. But for many of these plans, current problems with

the Medicare+Choice payments and increased regulatory burdens were too overwhelming, and they were forced to reduce their participation, to withdraw from the

program or to scale-back benefits.

Medicare+Choice Payment

The BBA limited the annual rate of growth in payments to health plans, producing $22.5 billion in savings from the Medicare+Choice program. In addition, the

BBA reduced geographic variation in payments to encourage the development of coverage choices in areas of the country with lower payments.

We supported the passage of payment reforms in the BBA and understood the

need to contribute our fair share toward the savings necessary to stabilize the Medicare Trust Fund. We are deeply concerned, however, that unintended consequences

of higher than anticipated inflation, the growing gap in funding between the

Medicare+Choice and fee-for-service sides of the program, and administrative actions taken by HCFA affecting Medicare+Choice payments do not serve the best interests of beneficiaries and were not anticipated by Congress.

In 1998 and 1999, because of the low national growth percentage and the inability

to achieve budget neutrality, no counties received blended payment rates. Spending

on medical services furnished to Medicare-eligible military retirees by Department

of Veterans Affairs (VA) and Department of Defense (DoD) hospitals continues to

be omitted from the calculation of Medicare+Choice rates. A few years ago, the Prospective Payment Advisory Commission (ProPAC) estimated that health care proVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00054 Fmt 6633 Sfmt 6621 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
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2 ‘‘An Analysis of the President’s Budgetary Proposals for FY 2000,’’ Congressional Budget Office. 3 AAHP calculation from PricewaterhouseCoopers (PWC) analysis prepared for AAHP, March

1999. AAHP’s analysis produces conservative estimates of the Fairness Gap by assuming that

county-level Medicare+Choice and FFS payments were equal in 1997, even though

Medicare+Choice payments were actually lower than FFS per capita payments in 1997. PWC

analysis based on first stage of risk adjustment. PWC analysis does not reflect second stage of

risk adjustment, which HCFA expects to reduce payments by an additional 7.5 percent in 2004.

The Fairness Gap represents growth between 1997 and 2004 in the projected difference between

county-level aged Medicare+Choice risk-adjusted per capita payments and FFS per capita payments. Top 100 counties by enrollment account for 72 percent of enrollment.

vided in DoD and VA facilities to Medicare beneficiaries accounts for 3.1 percent of

the total resource costs of treating Medicare beneficiaries. ProPAC concludes from

its findings that the omission of the cost of care provided in DoD and VA facilities

to Medicare beneficiaries leads to systematic errors in both the level and distribution of Medicare managed care payments. H.R. 2447, introduced by Congressman

McDermott, would help address this problem by including these amounts in

Medicare+Choice rate calculations.

In addition, the BBA sought to begin tackling some of the issues related to Graduate Medical Education (GME) reform by limiting the number of residents supported by the Medicare program and by providing incentives to hospitals to reduce

the size of their training programs. However, a central BBA provision, the removal

of GME funds from the calculation of payments to Medicare+Choice organizations,

does not appear to address GME reform goals. AAHP opposed the removal of GME

funds from the calculation of Medicare+Choice payments, particularly in the absence of broader, structural reforms to GME financing. AAHP voiced concern that

removal of GME funds could result in premium increases and/or benefit reductions

for beneficiaries enrolled with plans already participating in the program, inhibit

enrollment growth, and at worst could force some plans to leave the program.

This provision was intended to assure that beneficiaries have access to services

at these facilities and that these facilities are compensated for their teaching costs.

Studies show that health plan members do use teaching facilities and that plan payments for a given case in a teaching hospital greatly exceed payments for the same

case in a non-teaching hospital. Although GME payments are being removed from

Medicare+Choice payments, in many markets, the dominance of teaching hospitals

limits health plans’ ability to reflect the carve-out by making commensurate reductions in payments to teaching hospitals. Consequently, teaching hospitals are receiving GME payments from the Medicare program as well as higher payments from

health plans. Ultimately, it is the Medicare beneficiary who bears the burden of

these higher payments due to reductions in additional benefits that they otherwise

would receive.

Furthermore, HCFA has chosen to implement its new risk-adjustment methodology in a manner that will cut aggregate payments to Medicare+Choice organizations by an estimated additional $11.2 billion over a five-year period beginning in 2000. This is an administratively imposed increase in the $22.5 billion savings Congress expected from the payment methodology as enacted in the BBA. In fact, at

the time of the BBA’s approval, the Congressional Budget Office (CBO) did not

score the new risk-adjuster as saving money. More recently, CBO stated that

it had ‘‘previously assumed’’ that the health status-based risk-adjustment in the

Medicare+Choice program would be budget neutral.2

AAHP analysis of PricewaterhouseCoopers projections of Medicare+Choice rates

in each county over the next five years shows that a significant gap opens up between reimbursement under the fee-for-service program and reimbursement under

the Medicare+Choice program.3 This Medicare+Choice Fairness Gap will be at least $1,000 for two-thirds of Medicare+Choice enrollees living in the top 100 counties,

as ranked by Medicare+Choice enrollment (Figure 2). This same Fairness Gap will

exceed $1,500 per enrollee in major Medicare+Choice markets, including Chicago,

Los Angeles, Miami, New York, Boston, Pittsburgh, Cleveland, St. Louis City, Dallas, and Philadelphia. In Miami, the Fairness Gap will be $3,500 per enrollee in

2004 and in Houston the gap will exceed $2,500 per enrollee in 2004. In New Orleans, the Fairness Gap will exceed $2,600 per enrollee in 2004.

For nearly half of Medicare+Choice enrollees living in the top 100 counties, government payments to health plans on behalf of beneficiaries will be 85 percent or

less of fee-for-service Medicare payments in 2004, significantly exceeding estimates

of so-called overpayment due to favorable selection by plans (Figure 3). When AAHP

examined the top 101 to 200 counties as ranked by enrollment, we continued to find

a large Fairness Gap in the smaller markets that plans were expected to expand

into under the policy changes implemented by the BBA. In these counties, nearly

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half of Medicare+Choice enrollees live in areas where the Fairness Gap will be

$1,000 or more in 2004.

A large percentage of the Fairness Gap is attributable to HCFA’s new risk-adjuster, the design of which is severely flawed. Rather than measuring health-status,

HCFA’s risk-adjustment measures inpatient hospital utilization. This design penalizes health plans that use disease management programs designed to reduce hospitalizations for chronically ill patients who would have otherwise been treated in

inpatient settings. These programs are designed to prevent costly hospitalizations

by treating patients in alternative settings.

An AAHP analysis of PricewaterhouseCoopers projections that incorporate the effect of the risk-adjustment methodology, when it is phased-in at 10 percent, indicate

that nearly half of current Medicare+Choice enrollees live in areas in which year

2000 payments will increase by 2 percent or less over 1999 payments. This situation

will likely worsen in 2001 when HCFA will base 30 percent of Medicare+Choice payments on its risk-adjustment methodology. Contrary to ensuring predictability in

the new Medicare+Choice program, the impact of this risk-adjustment methodology

will be to restrict new market entrants and leave beneficiaries with fewer options,

reduced benefits and higher out-of-pocket costs. AAHP has found that the impact

of HCFA’s risk-adjuster on Medicare+Choice payments to rural and urban counties

is similar—rural areas with Medicare+Choice beneficiaries are cut by about 6 percent, while urban areas are cut by about 7 percent.

AAHP also has significant concerns about the funding of the Medicare beneficiary

information campaign. While it is reasonable for health plans and their enrollees

to contribute to funding HCFA’s education and information dissemination initiatives, their contribution should be in proportion to their participation in the Medicare program. Last year, Medicare risk HMOs and their enrollees represented 14.3

percent of the program, but shouldered 100 percent of the cost of the information

campaign.

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55

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The FY1999 $95 million funding level represents an annual cost of $2.40 per beneficiary if it is spread over the entire Medicare population of 39 million beneficiaries. It represents an annual cost of $15.43 per beneficiary if it is spread over

only those beneficiaries who have enrolled in a Medicare+Choice plan. On average,

generating the $95 million authorized by the BBA will require a tax of $1.90 each

month for each beneficiary enrolled in a Medicare+Choice plan (the tax is collected

over only the first nine months of the year). This $1.90 per month per beneficiary

tax represents 18% percent of the average monthly 1998 to 1999 payment increase

under the new BBA payment methodology.

AAHP supports the goal of providing beneficiaries with accurate information that

allows them to compare all options and select the one that best meets their needs.

Last year’s campaign did not meet Congressional expectations. Many beneficiaries

received incorrect or confusing information and some plans were left out of the brochure altogether. AAHP urges Congress to ask HCFA for an accounting of its use

of resources for educational purposes. We also urge Congress to adopt MedPAC’s

recommendation to fund this program through HCFA’s operating funds rather than

a tax on Medicare+Choice enrollees. AAHP continues to believe that the entire beneficiary information program should be reevaluated and streamlined.

HCFA documents indicate that it has $25 million left from the fees collected last

year and has indicated that next year’s appropriation should be offset by this

amount. Yet, HCFA is asking for more in new user fees than the amount collected

last year. Given concerns about the effectiveness of this effort and at a time of growing instability in the Medicare+Choice program, we strongly urge that the program

be scaled back and realistic goals set. In addition, we urge that the cost of a redesigned effort be distributed proportionately across the entire system.

Stabilizing Payment Will Help Stabilize the Medicare+Choice Program

The present state of the Medicare+Choice program is not what Congress expected

when the BBA was approved two years ago. Rather than having expanded coverage

choices, beneficiaries face fewer coverage choices. Additional benefits offered by

plans that are not available in the fee-for-service program are being jeopardized.

Some have argued that HCFA overpays health plans and that plans withdrawing

from the market are simply making ‘‘business decisions.’’ In response, first let me

say this: overpaid health plans do not leave a market. Overpaid health plans do not

reduce benefits. Second, payment and regulatory requirements dictate the type of

environment in which health plans participate in the Medicare+Choice ‘‘business.’’

So yes, the current payment and regulatory environment is forcing plans to make

difficult business decisions regarding their participation in the Medicare+Choice

program.

The Bilirakis-Deutsch bill, H.R. 2419, would go a long way toward stabilizing the

payment situation in both urban and rural areas by requiring that HCFA implement the new risk-adjuster on a budget-neutral basis, which is in keeping with Congressional intent. The bill also would ensure that national updates to government

payments for beneficiaries choosing a Medicare+Choice plan grow at the same rate

as government payments for beneficiaries choosing fee-for-service Medicare. H.R.

2419 represents an equitable restoration of funding by increasing the total dollars

available in setting Medicare+Choice payment rates. This approach will help ensure

that the BBA goal of expanding coverage choices for all beneficiaries is met.

Another way that payments could be stabilized is through establishment of a true

payment floor. As discussed earlier in this testimony, Medicare+Choice payments

are falling drastically relative to fee-for-service Medicare payments—in many areas,

payments are falling to 80 percent or less of fee-for-service payment. To prevent

this, a true floor could be set such that Medicare+Choice payments would not fall

below a specified percentage of fee-for-service per capita payments in a county.

Medicare+Choice Regulatory Environment Contributes to Program Volatility

The challenges facing the Medicare+Choice program do not result from payment

alone. HCFA’s approach to overseeing the program and the structure of the

Medicare+Choice program are contributing to the volatility in the program. Taken

together, the issues of payment and regulation have challenged plans’ abilities to

maintain their health care networks. In some cases, providers simply have told

health plans that given low payments and increased regulatory requirements on

them, that they are better off just seeing beneficiaries under the fee-for-service program.

HCFA Roles as Purchaser and Regulator in Conflict. HCFA’s dual roles as

purchaser and regulator are, at times, in conflict. Nowhere has this conflict been

more evident than in HCFA’s implementation of the BBA. The situation plans faced

in the fall of 1998 serves to illustrate the inherent conflict between HCFA’s tradiVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00059 Fmt 6633 Sfmt 6621 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
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tional role as a regulator and its changing role as a purchaser. HCFA published the

Medicare+Choice regulation, which was more burdensome than expected, nearly a

month and a half after the date plans were required to file their 1999 adjusted community rate proposals (ACRs) last year.

This situation and the unrealistic compliance deadlines combined with the reduced rate of increase in payments and the uncertainty created by the new riskadjustment model, caused plans across the country and across model types to become deeply concerned last fall about the viability of the benefits and rates included

in their ACRs on the originally mandated May 1st deadline. This led our members

to make an unprecedented request to HCFA to allow plans to resubmit parts of

their ACRs. In some service areas, the ability to vary copayments—even minimally—meant the difference between a plan’s ability to stay in the Medicare+Choice

program or to pull out of a market.

While this request presented HCFA with a complicated situation, AAHP strongly

believes that an affirmative decision would have been better for beneficiaries. As a

purchaser, HCFA had a strong motivation to maintain as many options as possible

for beneficiaries by responding to health plans’ concerns and adopting a more flexible approach to Medicare+Choice implementation. As a regulator, however, HCFA

had concerns about criticism that could result from reopening bids, and thus chose

not to allow any opportunity for adjustment of ACRs. HCFA’s decision in part contributed to the withdrawal of nearly 100 health plans from the program, affecting

more than 400,000 beneficiaries. These role conflicts remain unresolved, even largely unaddressed. Until ways are found to reconcile them, however, they will stand

in the way of designing and delivering a Medicare+Choice program that really

works for beneficiaries.

Need For Fair Regulations. Beneficiaries should have confidence that all options, including both Medicare+Choice plans and the Medicare fee-for-service program, meet standards of accountability that ensure that they will have access to all

Medicare benefits and rights regardless of the coverage choice they make. All

Medicare+Choice options offered to Medicare beneficiaries should be required to

meet comparable standards in such areas as quality of care, access, grievance procedures, and solvency.

These standards should be implemented through regulatory requirements that

make the best use of plans’ resources to ensure that beneficiaries receive the maximum value from the program. This means that when requirements are established,

their benefits must outweigh their costs. While we appreciate HCFA’s efforts to address concerns about certain aspects of the Medicare+Choice regulation over the

past several months, the fact remains that health plans are having to devote substantial human and financial resources toward compliance activities, which in turn

means fewer resources devoted to additional benefits.

AAHP renews its request that HCFA undertake an immediate analysis to develop

a full understanding of the relationship between the costs associated with the full

array of Medicare+Choice requirements and their value to beneficiaries and the

Medicare program. We believe strongly that more of these resources should be available for benefits and patient care.

Specific Areas of Concern with Medicare+Choice Legislative and Regulatory Requirements. Beyond the issues presented above the following specific

areas are among those that remain problematic:

• Discontinuation of Flexible Benefits Policy. Prior to enactment of the BBA,

Medicare HMOs were allowed to vary premiums and supplemental benefits

within a contracted service area on a county-by-county basis, and to customize

products—or offer ‘‘flexible benefits’’—to meet beneficiary and employer needs

and the dynamics of individual markets. The BBA and HCFA’s

Medicare+Choice regulations are both more restrictive than this policy, and require that Medicare+Choice plans offer uniform benefits and uniform premiums

across a plan’s total service area without regard to different county payment

levels. The result is that plans are less likely to continue or begin serving lowerpayment counties, just the opposite of expanding coverage choice. HCFA developed a transition policy for existing contractors, which allows Medicare+Choice

organizations to segment service areas and offer multiple plans in an effort to

mitigate the effect of moving away from the flexible benefits policy. While this

transitional relief has alleviated this problem in the short term, a permanent

solution is needed. AAHP encourages the Committee to revise the statute so as

to revert to the prior policy allowing flexible benefits within plan service areas.

• HCFA’s QISMC Standards Disregard Experience of Private Sector. One

area of significant concern to AAHP member plans is HCFA’s Quality Improvement System for Managed Care (QISMC). QISMC is designed to establish a

consistent set of quality oversight standards for health plans for use by HCFA

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and state Medicaid agencies under the Medicare and Medicaid programs, respectively. AAHP has long advocated coordination of quality standards for

health plans in order to maximize the value of plan resources dedicated to quality improvement. While AAHP believes that QISMC could have been designed

to contribute to this important goal, our members have a number of serious concerns regarding HCFA implementation of this program. Furthermore, we are

also concerned that the Medicare program is not providing equal attention to

the overall quality of care furnished under the fee-for-service program.

One of our primary concerns is that QISMC lacks clear coordination with existing public and private sector accreditation and reporting standards. Rather

than coordinate with existing standards, QISMC establishes an entirely new

system of requirement that not only are far more stringent, but also are unreasonable in their timeframes. Meeting two competing sets of standards adds to

administrative cost while detracting from health care quality improvement.

IV. SOLVING THE PROBLEMS THAT UNDERMINE THE SUCCESS OF THE MEDICARE+CHOICE

PROGRAM

AAHP and its members applaud the Subcommittee for holding this hearing and

implore the Subcommittee to move immediately in taking measures to restore stability to the Medicare+Choice program. In doing so, AAHP members urge the Subcommittee to consider the following four principles.

First, Congress must ensure that Medicare+Choice payments are adequate and stable and that they are comparable to those in fee-for-service

Medicare. Federal contributions to Medicare+Choice organizations should be adequate and predictable to promote expanded coverage choices for beneficiaries in low

payment areas, while maintaining the availability of affordable options for beneficiaries in markets in which health plan options are currently well established.

The Administration projects that its approach will cut Medicare+Choice payments

by an additional $11.2 billion over a 5-year period and thus endanger the very

choices, broader benefits, and out-of-pocket protections these beneficiaries enjoy. As

is now apparent, the BBA payment formula, in combination with the Administration’s new risk-adjuster, will not achieve this goal. Instead, AAHP analysis shows

a dramatic gap opening up between payments for beneficiaries in the

Medicare+Choice program and their counterparts in fee-for-service Medicare.

AAHP urges of swift approval of the bipartisan H.R. 2419, the Medicare+Choice

Risk-Adjustment Amendments of 1999, introduced by Congressman Bilirakis and

Congressman Deutsch. A budget-neutral risk-adjuster brings greater equity to payments without penalizing plans or destabilizing the program.

Second, HCFA’s beneficiary information and education effort should be

re-examined and refocused to meet beneficiary interests and needs. AAHP

supports the goal of providing beneficiaries with accurate information that allows

them to compare all options and select the one that best meets their needs. AAHP

urges Congress to ask HCFA for an accounting of its use of resources for educational

purposes. AAHP continues to believe that the entire beneficiary information program should be reevaluated and streamlined.

Third, Congress must promote and enforce a responsive regulatory environment. Without a doubt, the present instability has undermined beneficiaries’

confidence in the Medicare+Choice program. Unless action is taken to restore their

confidence, it is unlikely that the goals of the BBA will be achieved. Beneficiaries

deserve a well-run program that is responsive to their needs. Unfortunately, the

conflict between HCFA’s roles as a purchaser and regulator often prevent the Agency from acting more nimbly in the best interests of beneficiaries.

HCFA’s implementation of the BBA highlights the tension between these roles.

To increase consumer confidence in all aspects of the Medicare program, HCFA

should take immediate steps to improve administration and regulation of the

Medicare+Choice program. During the first year of Medicare+Choice implementation, HCFA promulgated more than 800 pages of new regulations and issued countless operational policy letters. The Medicare+Choice regulation should be re-examined to ensure that the value to beneficiaries justifies the resources required for

compliance.

V. CONCLUSION

For over a decade, health plans have delivered to beneficiaries coordinated care,

comprehensive benefits, and protection against highly unpredictable out-of-pocket

costs, but these coverage choices are at risk. Congress and the Administration

should act immediately to create a level playing field between the payments under

the Medicare+Choice program and the Medicare fee-for-service program, and a reguVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00061 Fmt 6633 Sfmt 6621 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
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latory environment based on the principles of ensuring that the value to beneficiaries justifies the resources required for compliance and equal accountability

under the Medicare+Choice and Medicare fee-for-service programs.

We urge you to address the Fairness Gap, and the problems we have identified

with HCFA’s implementation of the Medicare+Choice risk-adjuster, and with regulation of the program. We are in the process of conferring with the members of the

Subcommittee and your staff about AAHP’s specific suggestions—some of which we

have mentioned today—for solving these problems.

Our concern last year that without action, more beneficiaries would lose access

to their plan and that others would face reductions in benefits has become a dismal

reality. Further delay could render the Medicare+Choice program beyond repair or

salvage. This outcome would be a loss not only for the beneficiaries who have chosen

a Medicare+Choice plan, but also for future beneficiaries who would be denied the

opportunity to do so.

Mr. BILIRAKIS. Thank you very much, Ms. Ignagni.

Mr. Powell?

STATEMENT OF JOHN POWELL

Mr. POWELL. Thank you, Mr. Chairman, for the opportunity to

testify today.

The 3 million members and supporters of the Seniors Coalition

are grateful to you for your excellent leadership of this subcommittee and we appreciate the diligent and thoughtful work of

its members and staff in helping to find solutions to the many critical issues that are facing older Americans.

The enactment of Medicare+Choice was an historic first step in

giving seniors access to the kinds of health care options available

to other Americans. Seniors want choice and they want freedom

from one-size-fits-all program. Thus, the importance of the passage

of Medicare+Choice legislation cannot be overstated, and that’s

why we are so disappointed that its promise has not been fully realized.

When Medicare was created in the 1960’s, the U.S. was facing

a situation which had no precedent. For the first time, large numbers of people were growing old before they died, and we were not

equipped to address their health care needs.

Moreover, understanding of the process of aging was limited.

Most believed that the loss of mental faculties was a natural part

of aging. We thought Medicare must be based upon a structure

that would act in a decisionmaking role for beneficiaries who could

not act on their own behalf.

We, of course, now know that assumption was incorrect. Critical

thinking skills do not necessarily diminish with age, and the vast

majority of older Americans remain sharp of mind throughout their

lives.

But, unfortunately, we created a bureaucratic structure, the

Health Care Financing Administration, which was built upon this

age’s theory and which still operates on that basis today.

Then there are the changes in the practice of medicine. When

Medicare began, there had never been a heart transplant. There

were no medicines for high cholesterol. Patients spent weeks in bed

recovering from cataract surgery, and the concept of an artificial

bone joint belonged in the realm of science fiction.

Now, medicine has increasingly been focused upon the prevention of disease, not just upon treatment of acute illness. Eye surgery is performed in shopping malls, and inpatient hospital care is

60

the exception, not the rule, for not only the treatment of many illnesses, but even for many types of surgery.

The enactment of Medicare+Choice was a major step in helping

Medicare accommodate itself to the realities of aging and the practice of Medicare in the late 20th century, or so it was intended to

be, but 2 years later it still has not fulfilled its promise. There are

not hundreds of new entrants into the Medicare marketplace. Why

not?

The answer, we believe, lies in the seemingly endless succession

of barriers that have prevented full implementation of

Medicare+Choice.

First, consider the fact that HCFA took over 1 year from the passage of BBA to publish the 833 pages of regulations which laid

down the ground rules. With barely 2 months left to submit proposals, the initial deadline of last August 31st went by with barely

a nibble.

Then there is the question of performance standards. Many insurers had no structure for collecting the type of data required, not

to mention the fact that such data collection and management

would require that some plans rewrite all of their existing contracts with providers.

Now, a year later, the situation is no better. Rather than a stampede of plans seeking to enter the market, there are, in fact, plans

retreating from it, and we now know that is due in part to HCFA

deciding to squeeze an extra $11 billion from those very plans that

were supposed to be encouraged to enter the market.

Choice and competition are two sides of the same coin. Without

competition there is no choice. But neither can survive where there

is no incentive. HCFA, one might argue, not only removed the carrot of incentive, but also added far too many sticks.

Earlier this year the Seniors Coalition had the opportunity to

testify before this subcommittee on risk adjustment methodology

for Medicare+Choice payment. We said then that we were gravely

concerned that HCFA had chosen to base the risk adjustment upon

an outdated approach to the practice of medicine. We were concerned, of course, that plans would not be adequately compensated

for treating Medicare beneficiaries in outpatient settings and that

this would result in increased incidence of hospitalization or in

plans leaving the program.

And, just like CBO, we did not expect the new risk adjustment

system to change the overall payment level for such plans.

H.R. 2419, the Medicare+Choice Risk Adjustment Amendments

of 1999, is a major step toward stemming the tidal wave of plans

leaving Medicare+Choice, and the Seniors Coalition supports it. It

restores the original intent of Congress by requiring the establishment of a fair method for risk adjustment calculation. Finally, and

most importantly, it will help restore the original intent of Congress in its passage of plus-Choice, the empowerment of the Medicare beneficiary as a health care consumer.

[The prepared statement of John Powell follows:]

PREPARED STATEMENT OF JOHN POWELL, VICE PRESIDENT, GOVERNMENT AFFAIRS,

THE SENIORS COALITION

Thank you, Mr. Chairman, for the opportunity to testify today. The three million

members and supporters of The Seniors Coalition are grateful to you for your excelVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00063 Fmt 6633 Sfmt 6621 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
61

lent leadership of this subcommittee. We appreciate the diligent and thoughtful

work of its members and staff in helping to find solutions to the many critical issues

affecting the health of older Americans.

The Seniors Coalition believes that the enactment of Medicare+Choice was an historic first step in giving seniors access to the kinds of health care options available

to other Americans. Seniors want choice, they want freedom from a one-size-fits all

program that only offers the same benefits to everyone regardless of their needs or

circumstances. Thus, the importance of the passage of Medicare+Choice legislation

cannot be overstated, and that is why we are so disappointed that its promise has

not been fully realized.

To explain this, I would first like to speak for a moment about the history of

Medicare. When Medicare was created in the mid-1960s, the United States was facing a situation that had no precedent. For the first time in the history of the world,

large numbers of people were growing old before they died, but neither our economy

nor our society was equipped with programs to address their health care needs.

Thus, Medicare came into being.

But it is important to make two more points about the historical context in which

Medicare was created. First, in the mid-1960s, our understanding of the process of

aging was very limited. Most believed that loss of mental faculties were a natural

part of aging and that, to be useful and effective, Medicare must be based upon a

structure that would act in a decision making role for beneficiaries who could not

act upon their own behalf. Of course, we now know that assumption was wrong very

wrong. Critical thinking skills do not necessarily diminish with age, and the vast

majority of older Americans remain sharp of mind throughout their life. But, unfortunately, we created a bureaucratic structure, the Health Care Financing Administration (HCFA), which was built upon this archaic and ageist theory, and which still

operates on that basis today.

Second, consider the changes in the practice of medicine that have occurred in the

last 35 years! When Medicare began, there had never been a heart transplant; there

were no medications for high cholesterol, had we even understood its impact on the

cardio-vascular system; patients spent weeks in bed, flat on their back, recovering

from cataract surgery; and the concept of an artificial bone joint belonged to the

realm of science fiction. Now, medicine is increasingly focused upon the prevention

of disease not just upon treatment of acute illnesses; eye surgery is performed in

shopping malls; and inpatient hospital care is the exception, not the rule for not

only the treatment of many illnesses but even for many types of surgery.

The enactment of Medicare+Choice was a major step in helping Medicare accommodate itself to the realities of aging and the practice of medicine in the late 20th

century—or so it was intended to be. But, two years later, it has not fulfilled its

promise. There are not hundreds of new entrants into the Medicare marketplace;

far too many beneficiaries do not have the luxury of choosing from among a number

of options. And why not? The Seniors Coalition does believe that increased choice

was clearly the intent of the Congress. Thus we need to look elsewhere to find the

reason.

The answer, we believe, lies in the seemingly endless succession of barriers that

have prevented full implementation of the Medicare+Choice program. First, consider

the fact that HCFA took over a year to publish the 833 pages of regulations which

laid down the ground rules by which insurers could enter the Medicare market.

With barely two months to submit proposals, the initial deadline of last August 31

went by with barely a nibble.

Then, there was the question of performance standards. Many insurers had no

structure for collecting the type of data required, not to mention the fact that such

collection and management would require that some types of plans rewrite all of

their existing contracts with providers.

And now, a year later, the situation is no better. Rather than there being a stampede of plans seeking to enter the market, there are, in fact, plans retreating from

it. And, we now know, that is in no small way related to yet another hurdle, the

fact that HCFA has decided to squeeze out $11 Billion over the next five years from

the very plans that Medicare+Choice was created to encourage to enter the senior

market.

Choice and competition are two sides of the same coin. Without competition there

is no choice. But neither can survive where there is no incentive. HCFA, one might

argue, not only removed the carrot, but also added far too many sticks.

Earlier this year, The Seniors Coalition had the opportunity to testify before this

subcommittee on the risk adjustment methodology for Medicare+Choice payment

rates. We said then that we were gravely concerned that HCFA had chosen to base

them upon an outdated approach to the practice of medicine. We were concerned,

of course, that plans would not be adequately compensated for treating Medicare

62

beneficiaries in outpatient settings—and that this would result increased incidences

of hospitalization of Medicare beneficiaries or in plans leaving the program. And,

just like CBO, we also did not expect that this new risk adjustment system would

change the overall payment levels for such plans.

While we still believe that HCFA will take far too long to begin using a variety

of data for risk calculations, HR 2419 is a major step toward stemming the tidal

wave of plans leaving Medicare+Choice, and we give it our support. It restores the

original intent of Congress when it required the establishment of a new method for

risk adjustment calculation. And finally, and most importantly, it will help to restore the original intent of the Congress in its passage of Medicare+Choice the empowerment of the Medicare beneficiary as a healthcare consumer.

Mr. BILIRAKIS. Thank you, Mr. Powell.

Ms. Canja?

STATEMENT OF ESTHER CANJA

Ms. CANJA. Mr. Chairman, I am Tess Canja, president of AARP.

Thank you for the opportunity to share with you the beneficiary

perspective on the Medicare+Choice program and the future of

Medicare.

In 1997, Congress created and AARP supported Medicare+Choice

to introduce greater competitiveness into Medicare and to offer

beneficiaries more health plan options.

As this legislation passed, we understood that extending the

short-term solvency of the Medicare program required shared sacrifice from all who have a stake in Medicare—providers and beneficiaries, alike. We also recognized that Medicare+Choice would lay

the foundation for essential longer-term reform in Medicare.

But change never comes easy. This year, 99 Medicare+Choice

plans announced that they will not renew or that they will reduce

their service areas beginning in January of the year 2000. This will

affect over 300,000 beneficiaries.

Further, and probably of even greater impact next year will be

the number of Medicare HMOs that reduce their level of benefits

and increase cost-sharing by beneficiaries.

AARP is deeply concerned about the dislocation HMO withdrawals will cause beneficiaries. All of these beneficiaries have the

good fortune of still having Medicare, but the departure of Medicare HMOs from their areas means they will have fewer choices for

their Medicare coverage, and, in many cases, higher out-of-pocket

costs.

While only a little over 1 percent of those currently in

Medicare+Choice will lose the option to enroll in managed care entirely, the impact on each beneficiary who is affected is 100 percent.

The HMO industry contends that the BBA payment rates are the

chief reason that plans are pulling out of the Medicare market.

AARP does not have enough data to evaluate whether the payments are adequate or fairly calculated, but such claims should be

carefully reviewed to ensure that we don’t return to an era of overpayments to some plans.

In this connection, Congress must continue to try to determine

what the proper level of compensation for Medicare+Choice plans

should be.

The initial implementation of Medicare+Choice offers several lessons. First, while private sector approaches have been able to address some glaring gaps in Medicare, namely the lack of prescripVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00065 Fmt 6633 Sfmt 6602 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
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tion drug coverage and out-of-pocket costs, these are not without

their own failings. Beneficiaries enrolled in HMOs may be pleased

with their lower costs and additional benefits; however, as we have

seen, these beneficiaries will be exposed to the vagaries of the marketplace. They may not know from 1 year to the next whether their

plan will remain a Medicare option.

Second, the impact of the BBA has been and will continue to be

significant. It must be evaluated and understood before launching

additional Medicare reforms.

I want to emphasize the importance of fully understanding the

changes that have already been made under Medicare+Choice before we layer on new changes.

If Medicare reform legislation is pushed through too quickly before the effect on beneficiaries and the program is known, AARP

would be compelled to alert our members to the dangers in such

legislation and why we would oppose it.

Let me assure you, however, that AARP does not believe the status quo in Medicare is acceptable. To this end, my written statement identifies the fundamental principles that AARP believes

should be the basis of any efforts to reform the program.

Mr. Chairman, AARP is committed to making Medicare stronger.

We look forward to working with the committee and the Congress

to improve the Medicare+Choice program and to carefully explore

the best options for securing Medicare’s future.

Thank you.

[The prepared statement of Esther Canja follows:]

PREPARED STATEMENT OF ESTHER ‘‘TESS’’ CANJA, PRESIDENT-ELECT, AARP

Good morning Mr. Chairman and members of the Committee. I am Tess Canja,

President-elect of AARP. Thank you for this opportunity to share with you the beneficiary perspective on the Medicare+Choice program and the future of Medicare.

While this hearing is focused on evaluating the Medicare+Choice program and addressing its strengths and weaknesses, let me start by underscoring the enormous

importance of Medicare. For over thirty years Medicare has provided dependable,

affordable, quality health insurance for millions of older and disabled Americans.

My home state of Florida has one of the largest beneficiary populations in the nation, and I see firsthand what a difference Medicare makes in the lives of older

Americans. Medicare has been instrumental in improving the health and life expectancy of beneficiaries in Florida and across the nation. It has also helped to reduce

the number of older persons living in poverty.

Medicare’s promise of affordable health care extends beyond the current generation of retirees. Now, more than ever, Americans of all ages are looking to Medicare’s guaranteed protections as part of the foundation of their retirement planning.

AARP believes that in order for Medicare to remain strong and viable for beneficiaries today and in the future, we must confront the key challenges facing the

program. Among these challenges are: keeping pace with advances in medicine and

changes in health care delivery; and securing the necessary long-term financial stability for the program in light of the aging of the boomer generation.

To control the growth in Medicare expenditures and offer beneficiaries more

health plan options, in 1997 Congress passed, and AARP supported, the Balanced

Budget Act (BBA). The BBA provided significant program savings that extended

Medicare’s solvency until 2008; the recent report of the Medicare Trustees projected

7 additional years of solvency—to 2015. At the same time, the BBA addressed a

number of problems with the Medicare managed care program. It modified the payment methodology for plans to address significant overpayment problems. It also

made several major changes affecting the program’s beneficiaries, including: the creation of the Medicare+Choice program through which new types of plans could participate in Medicare; formulation of new rules for when and how beneficiaries can

enroll in health plans or Medigap plans; and requirements specifying the content

of information beneficiaries receive about those choices. In addition, as a result of

64

the changes mandated by the BBA, virtually every beneficiary will face higher outof-pocket expenses for health care.

AARP supported the BBA and its creation of Medicare+Choice in order to accomplish the objective of expanding choice in the program while also protecting access,

affordability, and quality of health care services. We understood that extending the

short term solvency of the Medicare program required shared sacrifice from all who

have a stake in Medicare, including both providers and beneficiaries. We also recognized that Medicare+Choice would lay the foundation for essential longer term reform in the Medicare program.

Lessons Learned from Medicare+Choice

The challenges and successes of Medicare+Choice will have important implications for the next phase of Medicare reform. The initial implementation of

Medicare+Choice offers several valuable lessons:

First, the significant withdrawals from the program by Medicare HMOs both this

year and next serve as a wake-up call to all who seek to bring private sector solutions to bear on Medicare’s problems. While some private managed care approaches

have been able to help remedy some glaring gaps in original Medicare—namely, the

lack of prescription drug coverage and high out-of-pocket costs—these are not without their own failings. When private businesses are given the authority to manage

a beneficiary’s care in exchange for the opportunity to earn a profit, several things

can happen. On the positive side, the innovations in administrative efficiency and

improved health care delivery may benefit the patient through lower costs, additional benefits, and better coordinated care. On the other hand, patients can be exposed to the vagaries of the market place. They may force instability in their benefits and premium charges, and worse yet, beneficiaries may not know from one year

to the next whether their plan will remain a Medicare option. It is a challenge to

separate the positive from the negative because the same factors create both results.

A private business may be more innovative and efficient, yet in the absence of an

opportunity to earn a profit, will leave (or not enter) the market. This dynamic is

part of the market place—particularly for publicly traded companies who have a responsibility to their investors. The beneficiary who gained extra benefits in the short

run may lose them in the long run. Congress anticipated this problem and provided

some protections for beneficiaries who move back into original fee-for-service Medicare.

Second, with every change to Medicare, there are unintended consequences.

Therefore, it is essential that policy makers and the public understand proposed

changes to Medicare and their effect on beneficiaries, providers, and the Medicare

program. This is especially important as the Congress moves forward on additional

Medicare changes. There must be a careful and thorough examination of the full

range of issues, including how the issues interact, as well as an understanding of

the trade-offs that will be necessary.

The Breaux-Thomas premium support plan and the President’s recent Medicare

reform proposal provide opportunities for examining different reform options and for

stimulating public debate. Genuine debate is critical to build public understanding

and support for reform. AARP believes it would be a serious mistake for anyone to

hinder debate or for Congress to rush to judgment on any reform option. However,

if reform legislation is pushed through too quickly, before the effects on beneficiaries

and the program are known and before there is an emerging public judgment, AARP

would be compelled to alert our members of the dangers of such legislation and why

we would oppose it.

Third, the significant number of Medicare HMO withdrawals has highlighted the

difficulties older Americans have because outpatient prescription drugs are not included in Medicare’s benefit package. Beneficiaries who seek drug coverage may find

Medicare HMOs are not available in many locations. Those who do enroll in Medicare HMOs for drug coverage are finding that drug benefits are becoming more expensive and/or more restrictive, or that they may lose the benefit or the option of

enrolling in an HMO altogether due to plan withdrawals. Once these beneficiaries

return to original fee-for-service Medicare, it is almost impossible for them to purchase a supplemental policy that includes some prescription drug coverage due to

cost and medical underwriting.

Fourth, beneficiary education about their Medicare options is critical to the success of the Medicare+Choice program. AARP supported Medicare+Choice in order to

give beneficiaries the full benefit of innovations in health care delivery. However,

Medicare+Choice can realize its potential only if beneficiaries acquire the knowledge

that will enable them to exercise their leverage as informed consumers in the health

care market place. We support the Health Care Financing Administration’s (HCFA)

efforts to educate beneficiaries, and AARP has joined with the Agency as a partner

65

in its education efforts. We believe Congress, too, must do its part by providing sufficient resources to enable HCFA to carry out its challenging tasks. In addition, we

believe it is important that Congress not be overly prescriptive in defining HCFA’s

education initiatives, but rather allow HCFA the flexibility to employ a range of

education techniques and materials for beneficiaries.

Issues Arising from Medicare+Choice Implementation

Medicare HMO Withdrawals and Benefit Reductions—Beginning late last fall,

Medicare beneficiaries began to feel the effects of the program’s transformation

when over 400,000 beneficiaries found themselves displaced from their current

HMOs after multiple plans terminated their Medicare contracts or reduced their

service areas. This year again, more Medicare HMOs have announced that they

would not renew their Medicare contracts or that they would reduce their service

areas beginning in 2000. HCFA estimates that these changes will affect 327,000

beneficiaries.

AARP is deeply concerned about the dislocation these Medicare beneficiaries will

face when their current HMO enrollment is terminated at the end of this year. All

of these Medicare beneficiaries have the good fortune of still having Medicare coverage, but the departure of Medicare HMOs from their areas means they will have

fewer choices for their Medicare coverage, and, in many cases, higher out-of-pocket

costs.

The majority of affected beneficiaries have the option of joining another HMO in

their area, but often this will mean changing doctors or losing extra benefits that

had attracted them to a particular HMO in the first place. Beneficiaries are also

entitled to return to original fee-for-service Medicare, but for many that is not a preferred option. Often, these beneficiaries chose managed care because it both relieved

them of the financial burden of Medigap insurance payments and because it offered

needed benefits, such as prescription drugs.

Under the BBA, beneficiaries who lose their HMO coverage and return to original

Medicare are given certain rights to purchase—or repurchase—a Medigap policy.

However, these beneficiaries will have to bear a the significant expense to do so,

generally in excess of $100 a month. Even if they can afford Medigap, not all beneficiaries are protected by the rules. Disabled beneficiaries may not have the right

to purchase any Medigap policy. With only very limited exceptions, older beneficiaries are not guaranteed the right to purchase a policy that includes drug coverage.

The 1999 Medicare HMO withdrawals will affect approximately five percent of all

Medicare+Choice enrollees. While only a little over one percent of those currently

in Medicare+Choice will lose the option to enroll in managed care entirely, the impact on each beneficiary affected is one hundred percent. In addition, the general

disruption in the HMO market could make other beneficiaries reluctant to enroll in

a Medicare HMO in the future.

Further, and probably of even greater impact next year, will be the number of

Medicare HMOs that reduce their level of benefits and increase cost-sharing by

beneficiaries. Many HMOs have announced that they will eliminate extra benefits

such as prescription drugs and/or they will raise the premiums they will charge.

Nearly three-fifths of plans are reporting they will cap prescription drug benefits

below $1,000 next year. The proportion of plans with $5000 or lower drug caps will

increase by 50% between 1998 and 2000. Further, beneficiaries who find themselves

in this situation are at a serious disadvantage. Their HMOs may no longer include

the benefits that made them attractive or their HMOs may now become much more

expensive. Beneficiaries in this situation have limited remedies. They can try to find

another HMO in their area or return to original Medicare, but they do not have the

same protections for purchasing a Medigap policy as those whose HMOs actually

have left the program, and even if they are able to find a policy, they will likely

face considerably higher out-of-pocket costs.

Payment Methodology—Several reasons have been put forward to explain the

HMO withdrawals from Medicare. The HMO industry contends that plans are pulling out of the Medicare market because the BBA Medicare payment rates and methodology are draconian. In contrast, the Government Accounting Office (GAO) has reported that the current movement of plans in and out of Medicare may be primarily

the normal reaction of plans to market competition and conditions. In an April, 1999

report on Medicare managed care plans, GAO concluded that while BBA payment

rates were undoubtedly considered by the plans in making their participation decisions, other factors involving the plans’ ability to compete were associated with plan

withdrawals. These included recent entry in the county, low enrollment, and higher

levels of competition.

66

Whether or not the payments are adequate or fairly calculated is an issue that

AARP cannot evaluate because we do not have enough data to do so. While it is

tempting to blame the government for this turmoil, in actuality, competition in the

managed care market place is playing a strong role. Aside from the federal payment, Medicare HMOs must consider whether they can compete effectively and attract enough Medicare patients to be profitable. If their bottom line performance is

not strong enough in a given area, plans will adjust their benefits or pull out of the

Medicare market entirely. This must be understood in order to determine how to

preserve enrollment stability for beneficiaries without undermining the fiscal integrity of the program.

In this connection, Congress must continue to try to determine what the proper

level of compensation for Medicare+Choice plans should be. To do this accurately

will require more information about how much it actually costs a plan to operate

efficiently and effectively. AARP has supported testing different payment approaches, including competitive pricing. We also have supported implementation of

risk adjustment because we believe that it will lead to fairer plan compensation.

Ultimately, the HMO withdrawal situation and the expected benefit reductions

underscore the importance of original Medicare. Regardless of the market decisions

of private health plans, beneficiaries need the security of knowing original Medicare

is there for them. It is not just those beneficiaries affected by HMO withdrawals

that rely on original Medicare being there for them. A quick look at a map of the

United States clearly illustrates that many areas of the country do not have HMOs,

and many of these areas are not likely to see HMOs any time soon.

Greater Medicare Reforms

As we have noted, Medicare+Choice is still in its infancy and many of the changes

enacted by the Balance Budget Act are still phasing in. The overall effects of these

changes on beneficiaries, providers, and the Medicare program itself are not yet

clear and there is much to be learned. The challenges and the successes of

Medicare+Choice will have important implications for broader reform of the Medicare program. The amount of ‘‘fine-tuning’’ now under discussion for

Medicare+Choice offers ample reason why larger-scale reforms in Medicare must be

made slowly and cautiously.

While we have stated the importance of understanding the impact of the changes

that have already been made before new changes are layered on top, this does not

mean that the status quo in Medicare is acceptable. More must be done to ensure

the program’s long-term solvency and to modernize Medicare’s benefits and delivery

system.

To this end, AARP believes that the fundamental principles that have guided

Medicare should continue to be the basis of any efforts to reform the program:

Defined Benefits Including Prescription Drugs—All Medicare beneficiaries are now

guaranteed a defined set of health care benefits upon which they depend. A specified

benefit package that is set in statute assures that Medicare remains a dependable

source of health coverage over time. It is also an important benchmark upon which

the adequacy of the government’s contribution toward the cost of care can be measured. A benefit package set in statute reduces the potential for adverse selection by

providing an appropriate basis for competition among the health plans participating

in Medicare, and provides an element of certainty around which individuals, employers, and state Medicaid programs may plan.

When Medicare began, the benefit package was consistent with the standards for

medical care at the time. In any reform, it will be important that the benefits be

clearly defined and reflect modern medical practices. To this end, prescription drugs

must become part of the standard Medicare benefit package and can be available

to all beneficiaries in whatever plan they choose.

Adequate Government Contribution Toward the Cost of the Benefit Package—It is

essential that the government’s contribution or payment for the Medicare benefit

package keep pace over time with the cost of the benefits. Currently, payment for

traditional Medicare is roughly tied to the cost of the benefit package. If the government’s contribution were tied to an artificial budget target and not connected to the

benefit package, there would be a serious risk that both the benefits and government payment would diminish over time. In addition, a change that results in a flat

government payment—regardless of the cost of a plan premium—could yield sharp

out-of-pocket premium differences, both year-to-year and among plans, with resulting volatility in enrollments.

Out-of-Pocket Protection—Changes in Medicare financing and benefits should protect all beneficiaries from burdensome out-of-pocket costs. The average Medicare

beneficiary spends nearly 20 percent of his or her income out-of-pocket for health

care expenses, excluding the costs of long-term care. In addition to items and servVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00069 Fmt 6633 Sfmt 6621 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
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ices not covered by Medicare, beneficiaries have significant Medicare cost-sharing

obligations: a $100 annual Part B deductible, a $768 Part A hospital deductible, 20

percent coinsurance for most Part B services, a substantially higher coinsurance for

hospital outpatient services and mental health care, and a significant coinsurance

for skilled nursing facility care. Currently, there is no coinsurance for Medicare

home health care.

Beneficiaries already pay a substantial amount of their health care costs—from

services not covered by Medicare, to Medicare’s cost-sharing obligations, to their

$45.50 monthly Part B premium. Further, the Part B premium beneficiaries pay is

expected to almost double in the next ten years.

AARP believes that beneficiaries are now paying, and should continue to pay their

fair share for Medicare. However, if their cost-sharing became to high, Medicare

beneficiaries would face increasingly unaffordable barriers to appropriate and necessary services. In addition, if cost-sharing varies too greatly across plans, the potential for greater risk selection would increase, leaving many beneficiaries with

coverage options they might consider inadequate or unsatisfactory.

Protecting the Availability and Affordability of Medicare Coverage—Medicare

should continue to be available to all older and disabled Americans regardless of

their health status or income. Our nation’s commitment to a system in which Americans contribute to the program through payroll taxes during their working years

and then are entitled to receive the benefits they have earned, is the linchpin of

public support for Medicare. Denying Medicare coverage to individuals based on income threatens this support. Furthermore, raising the age of Medicare eligibility

would have the likely affect of leaving more Americans uninsured. Thus, in the absence of changes that would protect access to affordable coverage, raising the eligibility age for Medicare is unacceptable to AARP.

Administration of Medicare—Effective administration of the program remains essential. The agency or organization that oversees Medicare must be accountable to

Congress and beneficiaries for assuring access, affordability, adequacy of coverage,

quality of care, and choice. It must have the tools and the flexibility it needs to improve the program—such as the ability to try new options like competitive bidding

or expanding centers of excellence. It must ensure that a level playing field exists

across all options; modernize original Medicare fee-for-service so that it remains a

viable option for beneficiaries; ensure that all health plans meet rigorous standards;

and continue to rigorously attack waste, fraud and abuse in the program.

Financing—Medicare must have a stable source of financing that keeps pace with

enrollment and the costs of the program. Ultimately, any financing source will need

to be both broadly based and progressive. Additionally, AARP supports using an appropriate portion of the on-budget surplus to insure Medicare’s financial health beyond 2015.

Conclusion—The initial implementation of Medicare+Choice is teaching us some

valuable lessons. It is essential that changes from the BBA and their impact on current and future beneficiaries are thoroughly analyzed before greater changes take

place. AARP looks forward to continuing to work with the Commerce Committee

and your colleagues in the House and Senate to improve upon the Medicare+Choice

program. We also want to work with you to advance a Medicare reform package that

includes prescription drug coverage. The status quo in Medicare is not acceptable,

but together we must ensure that any reform package continues Medicare’s promise

of quality, affordable health care.

Mr. BILIRAKIS. Thank you, Ms. Canja.

I was remiss in not congratulating you and also welcoming you.

Ms. CANJA. Thank you. It’s good to see you.

Mr. BILIRAKIS. It’s hot down there in Florida. It is good to be up

here.

Ms. CANJA. Yes.

Mr. BILIRAKIS. Dr. Moon?

STATEMENT OF MARILYN MOON

Ms. MOON. Thank you. I appreciate the opportunity, Mr. Chairman, to be here today to discuss the issues surrounding how private managed care plans are operating under Medicare.

There is, as we’ve heard today, a great deal of flux in the market

that is out there, but not all of it, I believe, is due to the Balanced

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Budget Act. Some of it is due to the natural workings of a marketplace, and it is important to sort those out.

As an important option for beneficiaries, the Medicare program

should, indeed, foster and encourage private plans to participate.

But, in turn, private plans need to be held accountable to the goals

that these plans are intended to achieve. That is, to achieve savings through the advantages of care management for the Federal

Government and beneficiaries, to allow beneficiaries who like this

kind of an environment the opportunity to have the opportunity to

receive their care from such a plan, and to encourage plans to offer

innovative services and benefits. That’s the promise, and hopefully

the delivery, that will happen in terms of having a managed care

option or private plan option in the Medicare program.

A look back over time indicates that Medicare’s payments were

not only generous in the past, they were often substantially higher

than what was being received by plans treating other population

groups.

At the same time that private managed care plans were arguing

that they are more efficient than fee-for-service and offering their

services with low annual growth rates for the under-65 people, they

were getting the fee-for-service growth rate increases in Medicare,

often in excess of 10 percent a year, handed to them each year.

The changes enacted in the BBA all have strong justifications in

past research and analysis and should not necessarily be thought

of as a fairness gap; rather, they are an attempt, I believe, to level

the playing field between private plans and Medicare, which for

some time has been tilted in favor of private plans.

Plans do have legitimate claims to fair treatment in terms of

payment levels, stability over time in those payments, and requirements on their behavior, but simply because plans are pulling out

or reducing their benefits does not necessarily say that the changes

in the BBA were wrong.

For preliminary information available on what will happen in

January, 2000, it appears that the share of beneficiaries affected at

all will be less than 1 percent of the Medicare population. This is

certainly comparable to the share of persons expected to be affected

by the Federal employee’s health benefits program, for example,

and the pullouts that will occur there next year, and just half the

share of retirees in FEHBP who normally change plans each year.

In a market system, withdrawals should be expected. Indeed,

they are a natural part of the process by which uncompetitive

plans that cannot attract enough enrollees leave particular markets. Certainly, last year many of the pullouts that occurred where

the enrollees were in areas where there were 5,000 or fewer beneficiaries indicate that there are certainly issues going on in the flux

in the market that is, to some extent, a natural process.

The whole idea of competition is that some plans will do well and

in the process drive others out of those areas. In fact, if no plans

ever left, that would likely be a sign that competition was not

working well. So if we want to have a competitive market environment we’re going to have to expect these kinds of withdrawals.

That’s not to say it is necessarily easy or pleasant for the beneficiaries that are involved in this kind of situation, but some have

suggested also that the scaling back of extra benefits signals that

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payments are too low for these plans. However, to the extent that

extra benefits were made possible by overly generous premium payments from Medicare, as we’ve heard earlier today, these changes

may again be viewed as leveling the playing field.

Although it is painful for beneficiaries attracted to these private

plans for promised extra benefits to lose them in the next year, a

greater injustice would be done by increasing payments to assure

that private plan enrollees get extra benefits, while those who remain in fee-for-service, either by choice or by necessity, do not.

While withdrawal of plans is both a natural and necessary part

of a competitive, market-based approach, that does also not mean

that the transitions will be smooth or painless or that we should

ignore them.

For those who are in poor health, for those in the middle of a

treatment regimen for a problem like cancer, for those who are frail

or home-bound, having to make major changes in their personal

health care delivery system will, indeed, be very difficult, and it is

important to find ways to assure that there is as much stability in

the system as possible, but I don’t think we just jump to higher

payments to do that.

I believe we need to have a lot better education for individuals

so that they understand what the implications are of a market system, and I also believe that prescription drugs are a particularly

key benefit, because it is one that is easy to manipulate and one

for which people are both attracted and at great risk when changes

occur.

Thank you.

[The prepared statement of Marilyn Moon follows:]

PREPARED STATEMENT OF MARILYN MOON, SENIOR FELLOW, THE URBAN INSTITUTE

I appreciate the opportunity to be here today to discuss issues surrounding how

private managed care plans are operating under Medicare. The flux in the overall

health care market and changes brought about by the Balanced Budget Act of 1997

have generated challenges for the private plans that serve Medicare. It is important

to attempt to sort out what is happening, why and whether it generates problems

for the beneficiaries that the program was designed to serve.

Although private plan options have been around for quite a long time, they have

recently begun to attract a larger share of the Medicare population. This makes

them an ever more important feature of Medicare. Moreover, since many of the options for reforming Medicare now being discussed would either place more reliance

on such plans and/or change the way in which they operate within Medicare, there

may also be important lessons for reform from studying what is happening today.

The headline in a recent press release from the American Association of Health

Plans proclaimed, ‘‘Insufficient Government Funding for Beneficiaries Forces Medicare HMO Cutbacks.’’ My testimony today will contend that announced withdrawals

are not particularly surprising or unusually large, that the reason offered by AAHP

for such changes is only one of several possible explanations for changes occurring

in private plans, and that the real issue is what will happen to Medicare beneficiaries as a result of these changes. But first, it is important to examine some

background on what has been happening to Medicare + Choice.

The Role of Private Plans in Medicare

As an important option for beneficiaries, the Medicare program should foster and

encourage private plans to participate. But, in turn, private plans need to be held

accountable to the goals they are intended to achieve: 1) to use the advantages of

care management to achieve savings for the federal government and beneficiaries,

2) to allow beneficiaries who like a managed care environment the opportunity to

receive their care from such a plan, and 3) to encourage plans to offer innovative

services and benefits. If these plans cannot do better than the basic Medicare program in restraining costs and if they do not generate ‘‘value added’’ in terms of proVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00072 Fmt 6633 Sfmt 6621 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
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viding alternatives that attract beneficiaries, then should alarms be raised if this

option does do not become a greater share of the Medicare program?

The BBA sought to both offer additional alternatives to beneficiaries and to

achieve savings from private plans through various payment reforms. Even more

than many of the savings achieved from the traditional fee-for-service part of the

program, the BBA changes in payment reflected a strong body of research that had

demonstrated that payments to private plans were too high on average. Medicare

was losing money on each beneficiary who signed up for this option. This was because beneficiaries opting for managed care were (and according to a recent study

by the General Accounting Office, still are) healthier than others like them in the

beneficiary population. The existing risk adjustment mechanism failed to capture

these differences. Consequently, Medicare paid too much for each enrollee, enabling

plans to use these resources to offer additional benefits that made them attractive

to potential enrollees. Further, the Medicare program contains a number of additional subsidies for certain hospitals in its fee-for-service payments to help support

medical education and coverage of indigent patients. Because of the way in which

premium payments to private, managed care plans were made prior to BBA, these

subsidies were passed on to the plans. But plans were not required to then pass

on these benefits to the hospitals who should be receiving such subsidies. Consequently, payments were too high for this reason as well.

A look back over time indicates that Medicare’s payments were not only generous,

they were often substantially higher than what was being received by plans treating

other population groups. At the same time that private managed care plans were

arguing that they were more efficient than fee-for-service and were offering their

services with low annual growth rates, they were getting the fee-for-service growth

rate increases (often in excess of 10 percent) handed to them each year in Medicare.

The BBA attempted to rectify these issues with three sets of changes: 1) addition

of an improved risk adjustment mechanism beginning next year, 2) short term reductions in payment levels to bring the amounts closer to where they should have

been if a better risk adjustment factor had been in place in the past, and 3) taking

out of the premium payments for private plans part of the cross-subsidies found in

Medicare and instead giving them directly to hospitals. These changes all have

strong justifications and should not be thought of as a ‘‘fairness gap.’’ Rather, they

are an attempt to level the playing field between private plans and Medicare which

for some time has been tilted in favor of private plans. Further, if these changes

had been fully applied, some plans might actually have seen their payments decline;

but the BBA placed a safety valve of a guaranteed 2 percent increase in payments

each year even for plans in very high premium areas.

Plans do have legitimate claims to fair treatment in terms of payment levels, stability over time in payments and requirements on their behavior. Reporting rules

and regulations should be reasonable in terms of the costs of complying. And it is

important to continue to monitor payment levels to assure that they are fair. But

just because the payment levels have been restricted is no reason to believe there

is a problem. It is necessary to look further.

To demonstrate that they are being unfairly treated, plans have been pointing to

the withdrawals and lower benefit offerings that occurred in 1999 and that have

been announced for January 1, 2000. But here again, it is necessary to ask whether

this is just due to Medicare payment changes and new regulations or whether other

factors are also at work.

Putting the Size of Withdrawals into Context

A large number of plans announced withdrawals from Medicare + Choice in 1999.

But by June of this year, the number of total participants in the program was 6.86

million beneficiaries, up over 260,000 persons from June of 1998 (when the figure

was 6.40 million). Further, the number of risk contracts, while smaller, was still

over 400.

From preliminary information available on what will happen in January, 2000 to

plans participating in Medicare + Choice, it appears that most beneficiaries will be

unaffected. That is, 95 percent of enrollees in these plans will not have to make

changes unless they elect to shift. Since enrollees in Medicare + Choice accounted

for a little over 17 percent of all Medicare beneficiaries, the share of beneficiaries

affected at all will be less than 1 percent. That is comparable to the share of persons

expected to be affected by the Federal Employees Health Benefits Program (FEHBP)

pullouts next year and just half the share of retirees in FEHBP who normally

change plans each year, for example. Further, over three-fourths of those beneficiaries affected by withdrawals will still have at least one other private plan to

choose from in addition to traditional Medicare. As this suggests, one major reason

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why individuals may have to change plans has more to do with the nature of a private-sector approach to Medicare.

What Are the Implications of Private Plans and Competition in Medicare?

Choice among competing plans and the discipline that such competition can bring

to prices and innovation are often stressed as potential advantages of relying on private plans for serving the Medicare population. But imbedded in those characteristics are also some of the responses by plans that are now being heavily criticized.

That is, if there is to be choice and competition, some plans will not do well in a

market and as a result they will leave. In a market system, withdrawals should be

expected; indeed, they are a natural part of the process by which uncompetitive

plans that cannot attract enough enrollees leave particular markets. If HMOs have

a hard time working with doctors, hospitals and other providers in an area, they

may decide that this is not a good market. And if they cannot attract enough enrollees to justify their overhead and administrative expenses, they will also leave an

area. The whole idea of competition is that some plans will do well—and in the process drive others out of those areas. In fact, if no plans ever left, that would likely

be a sign that competition was not working well.

No one has raised major objections to the fact that a share of FEHBP plans drop

out of that program each year, for example, or that individuals shift across plans.

It seems inconceivable then to criticize the Medicare program simply because some

plans leave various markets. That is the very nature of competition. And, from preliminary data, it appears that many of the withdrawals by plans are only in certain

areas where the affected plans were unable to reach a critical mass to continue in

operation. This was also a key reason for withdrawals in January of 1999.

The Issue of Premium Increases and Benefit Reductions in Medicare + Choice

Most plans routinely eliminate or reduce Medicare’s cost sharing requirements

and add other benefits as well. Because managed care plans seek to oversee the use

of care directly rather than relying as much on cost sharing as compared to fee-forservice plans, managed care organizations do not need to be compensated for this

additional offering; indeed, beneficiaries should expect this as a tradeoff for having

less autonomy in the care they receive. But in addition, many managed care organizations also offer extra benefits such as prescription drug coverage, dental and vision care at either no additional premium or a premium substantially below the

costs of private medigap coverage that many fee-for-service patients purchase.

The announcement by some plans who are remaining in Medicare that next year

premiums will be increased or extra benefits cut is likely related to Medicare policy

changes (as well as to other factors such as the increasing costs of prescription

drugs). Because premium payment levels by the federal government are not increased as fast as in the past, it should not be surprising that plans respond by restricting the generosity of the additional benefits they offer beyond what Medicare

requires.

But some have suggested that the scaling back of extra benefits signals that payments are too low for these plans. However, to the extent that these extra benefits

were made possible by overly-generous premium payments from Medicare, these

changes again may be viewed as leveling the playing field. Beneficiaries who do not

or cannot enroll in private plans have been at a disadvantage because they do not

have access to these extra benefits. If payments to plans were raised to restore extra

benefits, this would thus generate a critical fairness issue. Although it is painful for

beneficiaries attracted to these private plans for promised extra benefits to lose

them in the next year, a greater injustice would be done by increasing payments

to assure that private plan enrollees get extra benefits, while those who remain in

fee-for-service do not.

Beneficiaries at Risk

While a strong case can be made that many of the changes affecting Medicare’s

private plans are a combination of market forces and intended policy changes that

require no intervention by the Congress, there will be important and painful impacts on beneficiaries. And these consequences should be carefully examined for lessons for the future.

While I have argued above that it is important to recognize that withdrawal of

plans is both a natural and necessary part of a competitive, market-based approach

to providing health care, that does not mean that transitions will be smooth or painless for beneficiaries. For those in poor health, for those in the middle of a treatment

regimen for a problem like cancer, for those who are frail or homebound, having to

make major changes in their personal health care delivery system will be difficult.

Finding ways to assure that there is as much stability in the system as possible

72

for these beneficiaries is crucial, and somewhat at odds with a market-based approach.

Even if the benefits that individuals have enjoyed in private plans came about because of overly generous federal contributions, that will not make beneficiaries content to lose such benefits over time. Many older and disabled persons have been attracted to managed care plans precisely because of the extra benefits offered. They

may have made sacrifices to join such plans, including learning a new system of

care and finding new doctors and other service providers only to discover that next

year these benefits will be scaled back. How many beneficiaries understand that

once they join a plan with all its promised benefits, that the promise extends for

only one year?

Remedies that sustain these windfall benefits are not fair to other beneficiaries

who remain in fee for service. Instead, better education and information on the issue

of what it means to enroll in a private plan option is needed. Recent surveys have

shown that many beneficiaries do not understand the full range of conditions and

requirements surrounding managed care, suggesting that they may be attracted by

extra benefits and other promises without understanding the full nature of that decision. Advertising for such plans, for example, has a tendency to tout in headlines

the extra benefits but use the small print to caution about restrictions. Managed

care plans can have a lot to offer Medicare beneficiaries, but the choice should be

an informed one.

Another key issue raised by the changes announced by plans this year, and a

trend that has actually been going on for several years, is the nature of the cutbacks

in benefits. Many analysts have noted and warned that prescription drugs are difficult to offer in a fully voluntary environment because they naturally attract a sicker population who are likely to be heavier users of health care of all sorts. It is thus

natural for plans looking for ways to reduce their costs to cut back on such benefits.

If these benefits are increasingly limited over time, it will increase the importance

of the debate over whether drugs ought to be offered as part of a basic Medicare

package.

Mr. BILIRAKIS. Thank you so much.

Rabbi Malavsky?

STATEMENT OF RABBI MORTON MALAVSKY

Rabbi MALAVSKY. Thank you very much. Good morning, Chairman Bilirakis, Ranking Member Brown, and other distinguished

members of the Health Subcommittee. Or, Chairman Bilirakis,

should I say good morning? Or, no, it is already afternoon.

Mr. BILIRAKIS. You do it well.

Rabbi MALAVSKY. I am Rabbi Morton Malavsky, and I am

pleased to be here this morning to talk to you in person about some

of my experiences with the Medicare+Choice program, particularly

Humana’s health plan, its services, and its doctors.

You know, I feel I must digress a little bit and draw this analogy.

Science has progressed so much today, when you want to call some

firm or outfit you dial the telephone and it is push one, push two,

push three, push five. It’s annoying. You sit there for the longest

time and you’re pushing all kinds of buttons. When I do that and

somebody finally comes on, I say, ‘‘Thank God there is a live person

there that I can talk to.’’ Well, I’m that live person who is here

today to talk to you as one of the beneficiaries that you are all talking about but so few people get to meet or to see.

I know that there have been pros and cons about the program,

but would somebody tell me of any program that they know, be it

in the health field or otherwise, that there is no controversy about?

Any program?

As a matter of fact, in my years of experience I have found that

the better a program, the more controversy, the more people look

to find problems with it.

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I am here today to tell you that I am one of the 6 million and

more, and the overwhelming majority of HMO members who are

very happy with their plan, and I would very much appreciate for

Congress not to do anything that would jeopardize what we already

have.

Moreover, I would beg that they live up to the commitment to

the Medicare+Choice program by ensuring its viability financially

in the future.

Of course we are grateful. We are grateful to Chairman Bilirakis

and to Congressman Deutsch for your outstanding work in introducing H.R. 2419. It does provide seniors the confidence that our

Medicare+Choice program is here to stay in our communities.

First of all, let me tell you that I quite regularly proudly tell my

friends that I am enrolled in an HMO. I haven’t had problems yet.

In fact, I deal with people who have problems in their traditional

programs, dealing with bureaucracy and other situations.

I have been a member of Humana HMO for the past 5 years. Initially, I joined Humana because my doctor, who was then my primary physician, recommended I do so and suggested that I would

benefit from the type of coordinated care, from the preventative to

the acute services——

Mr. BILIRAKIS. Rabbi, forgive me, sir, but we have a vote on the

floor, and we’re probably down to about 2 minutes. I don’t want you

to have to rush through. You’re on a roll here.

Anyhow, I think it is best if, with your forgiveness, we break at

this point.

Rabbi MALAVSKY. Fine.

Mr. BILIRAKIS. Because we’ve got to run, and I know that a lot

of people probably want to grab a bite to eat, let’s break until 1:20.

That will give you all an opportunity to grab a quick bite, too.

Rabbi, we’ll get right back to it, so hold that thought.

[Brief recess.]

Mr. BILIRAKIS. Now, Rabbi, for the sake of continuity, you’re welcome to back up in your testimony and not necessarily start from

the beginning, but virtually so.

Rabbi MALAVSKY. All right.

I left off just past where I said that I regularly am proudly happy

to tell my friends that I am enrolled in an HMO and that I’ve

never had problems.

In fact, it is the people with traditional programs that I see on

a regular basis lying there and waiting in the emergency rooms,

waiting for service, and others trying to get appointments with doctors and waiting lists, etc., etc.

I have been a member of Humana HMO for 5 years, since 1994.

Initially, I joined Humana because my physician, who had been my

physician at that point for about 24 years, suggested, and he said

I would benefit from the type of coordinated care, from preventative to acute services, as well as prescription drug coverage.

Congress, I hope, will adequately fund the Medicare+Choice program. If not, there are many, many thousands of seniors and millions of them like me who will have no choice and no access to

these type of services.

Every day, Medicare+Choice is making a positive difference in

the health of seniors and their lives.

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Let me take but a few moments and tell you a little bit about

the experiences I’ve had, just one or two, in utilizing—unfortunately and fortunately—some of the medical assistance and experiences that I have gone through.

It is regularly commented upon that an ounce of prevention is

worth a pound of cure. My physician would regularly say to me,

‘‘You know, your plan or your Medicare or your supplemental insurance will not cover procedure A, B, or C, but I think we ought

to do it anyhow.’’ He was more than my primary, he was my friend,

and so it was done.

When I came under the plan, there was no question about it.

And this happened twice, once about 4 years ago and then this

summer again. My prostatic screening was irregular, and the PSA

had gone to two or three times the number. I’ve learned all about

it, since. And both the physician and the urologist immediately

thought of one thing—cancer. They needed to go beyond that, and

going beyond that meant a test, it meant a biopsy.

Well, the test was taken and the biopsy was taken and, had I

been not under HMO but a supplemental insurance or Medicare

that I used to have, first, they would not have required it, and if

I had done it and it came up as it did, there would have been quite

a bit out-of-pocket expense.

The results, by the way, were startling because it was shocking

to both of my physicians, and when they sent me to the work-up

and the biopsy, thank God—I had to wait for a full week, but it

came through. My urologist has given me a clean bill of health,

with the only thing that I need to go back every 6 or 8 months or

something to check it out.

Preventative services I honestly believe saves lives and saves

your mind thinking about it. You can just go to pieces worrying

about what might happen, and I’m thankful that my health plan

places such importance on preventative medicine, on checking

these things out.

But, you know, the health plan is there not only for preventative

services; they are there when you need them in an emergency, as

well.

It will be 2 years this Yom Kippur that I very sadly think back,

and yet I am very grateful. After the memorial service in the afternoon, I suddenly felt ill on the pulpit. I broke out in cold sweat.

I had a physician who is not mine, but there are several physicians

in the congregation all the time—they do come to services—and I

motioned to one of them. He came up and he was very conservative

about his approach. He’s not my doctor and did not know my case,

but took me right back, had me lie down on the floor, called the

9-1-1 and had the full spiel, everything.

In the meantime, they reached my doctor. He gave them a diagnosis over the phone of what he thought it might be, but they

would take no chances.

I was rushed to a hospital Yom Kippur afternoon. There was a

team of doctors and nurses waiting for me.

I am an HMO patient. I am not a supplemental or just Medicare

or top-paying patient. They were waiting for me—didn’t take any

time getting information. They already had it.

75

I was tired of what they did to me with the tests and testing and

checking. I don’t think they left a drop of any stone unturned. And

then they had a list of things that I had to do—this test, that test.

I was hospitalized for 3 or 4 days. My physician came up right

away. His diagnosis happened to be so. It was hypoglycemia. It was

not the heart. But I had a stress test and I had a vascular surgeon

and a neurological surgeon—all of them, people I’ve never heard of,

problems I’ve never had before, but everything was checked out.

And when I left, and even after that, I said, ‘‘Is there any bill?’’

‘‘No, no, it’s all taken care of. Everything is taken care of. All you

have to do is go back to these different doctors from time to time.’’

Mr. BILIRAKIS. Please summarize, Rabbi, if you will.

Rabbi MALAVSKY. Yes.

With a track record like this, it’s not surprising that my health

plan has been recognized for their congestive heart disease management program. This program has given so many people additional life.

And medication—I probably save close to $5,000 a year. I don’t

know about the dollars and cents, but I would welcome you to compare what HMO gets and what Medicare gets. I think you’ll find

that some of the traditional Medicare payments and fee-for-service

payments are considerably higher.

So let me say to you we beg of you to see to it. You’ve allowed

us to grow older. We, the senior citizens of America, owe you, the

Congress, a great debt. You have developed medicine scientifically

to a point that, whereas people were dying in the 60’s and 70’s, it

is now 80’s and 90’s, it will be 100’s and 110’s and 120. But now

that we grew older, help us stay well.

I cannot think of anything better to describe that but a little

analogy. It’s a little European story that I finish with, a story

where we are told that the Congress is ready to take this away and

that away and give us less and less; that a man who was a taxi

driver in a small town in eastern Europe, he was—not a taxi, he

had a little wagon and a horse and he would take people from town

to town. He couldn’t make it. It was rough. So he decided he’s got

to cut expenses, so he fed his horse a little less 1 day. You know

what? He still carried the load the next day, so he gave him a little

less yet, and again a little less.

On the sixth day the horse died. So he came to his rabbi and he

said, ‘‘I don’t understand. I finally taught my horse not to eat and

he died on me.’’

You have brought us to a station in life that we never dreamed

of. We’re up there in years, the 70’s and 80’s and 90’s. Please don’t

neglect us, whatever it takes, however you work it out. Don’t fix

it if it’s not broken, and don’t deny us this wonderful, wonderful

service.

Thank you very much.

[The prepared statement of Rabbi Morton Malavsky follows:]

PREPARED STATEMENT OF RABBI MORTON MALAVSKY

Introduction

Good morning, Chairman Bilirakis, Ranking Member Brown, and other distinguished members of the Health Subcommittee, I am Rabbi Morton Malavsky and

I am pleased to be here this morning to talk to you about my experience with the

76

Medicare+Choice program and, particularly, my experience with my Humana’s

health plan and doctors.

I know HMO quality has been a big issue. I am here today to tell you I am one

of an overwhelming majority of HMO members who is extremely pleased with my

plan. And, I don’t want Congress to do anything that will put my benefits in jeopardy. Moreover, I want the Congress to live up to its commitment to the

Medicare+Choice program by ensuring it remains financially viable. Thank you,

Chairman Bilirakis and Congressman Deutsch, for your outstanding work in introducing H.R. 2419—it does provide seniors the confidence that our Medicare+Choice

program will stay in our communities.

First of all, let me say, I regularly and proudly tell my friends I am enrolled in

an HMO. I have never had problems. In fact, it is my friends in the traditional

Medicare program, dealing with the government bureaucracy, who seem to have the

problems.

I have been a Humana member since 1994. Initially, I joined Humana because

my doctor recommended I do so and suggested that I would benefit from the type

of coordinated care—from preventive to acute services, as well as prescription drug

coverage—that Humana offers. Congress needs to adequately fund the

Medicare+Choice program—otherwise thousands of seniors, like me, will have no

choice and no access to these types of services.

Every day, Medicare+Choice is making a positive difference in seniors’ health and

lives. And, I want to take a few moments to share with the Committee members

some of my personal experiences.

Preventive Services

You always hear that an ounce of prevention is worth a pound of cure. Early this

summer, I underwent a prostate screening assessment (PSA). My Humana health

plan insisted I get this test I may not have on my own. The supplemental insurance

I used to have would not have covered this.

Well, the test results were startling. I was shocked when my doctor indicated that

there was a possibility of cancer because my PSA had risen dramatically. My doctor

then sent me immediately to an urologist for a work-up and a biopsy. I thank God

the results were negative.

My urologist has since given me a clean bill of health and made a point to establishing a schedule for my routine check-ups. Preventive services do save lives and

I am thankful that my health plan places such importance on these early detection

services.

Acute needs

But my health plan isn’t just there for preventative services; they were there

when I needed them most. In 1997, while at the pulpit delivering a sermon during

Yom Kippur, I broke into a cold sweat and began to experience chest pains. Within

minutes, a physician in the congregation came to my aide. I was raced to an emergency room where my own personal doctor met me. While my doctor thought I probably hypoglycemia, he thought it was important for me to get immediate attention

anyway. At the hospital emergency room, there were a team of physicians and

nurses to treat me. I underwent a myriad of tests, including a stress test. No stone

was left unturned. The quality of care that I received in the emergency room was

first-rate. And, Humana paid the entire bill. Under my old supplemental plan, I

would have had to pay a deductible and coinsurance—even for this emergency care.

With a track record like this, it is not surprising that my health plan has been

recognize for their congestive heart disease management program. Seniors like

Humana and their team of doctors because, like me, they are confident that the

quality of care will be the best the system has to deliver.

Prescription Drugs Coverage

Medicare+Choice plans give seniors affordable access to life-enhancing prescription drugs. More importantly, Medicare+Choice plans help protect seniors from catastrophic health care costs of escalating drug costs. Prior to joining Humana 1994,

I was paying a monthly Medigap premium of over a $125 a month and averaged

monthly out-of pocket costs of $200 per month in out-of-pocket expenses. To seniors,

this is real money. For me specifically, I save about $5000 per year. No press release

or political speech can ease the anxiety seniors’ feel when they are faced with the

uncertainty rising prescription drug costs or the potential of losing their drug benefit. In Lakeland, Florida, Humana is able to offer prescription drug coverage with

a $10 co-payment. It is not difficult to understand that I was attracted to a

Medicare+Choice option because of two simple factors—lower costs and better benefits.

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Conclusion

In closing, I would like to share a story with you. There was a man who thought

he’d save money on his deliveries if he could just save money on the grain it took

to feed his horse. So, he decreased the amount he fed his horse. Well, he was so

impressed with the money he’d saved, he fed the horse even less. Finally, he

thought he could save a lot more money if he didn’t feed the horse at all. As you

can guess, the horse died from starvation.

My point is this: Medicare+Choice is a program that works. Please do not be

shortsighted and starve it. You could kill the program—a program that provides

quality benefits (which for me include prescription drugs, eyeglasses, and hearing

aids) to a large number of seniors who rely on it and believe it is a real choice.

Again, thank you for the opportunity to appear before you to share my experiences with the Medicare+Choice program. I would be pleased to answer any questions the Committee members have.

Mr. BILIRAKIS. Thank you very much, Rabbi.

Mr. BURR. Mr. Chairman, clearly HCFA has heard his story before about the horse.

Mr. BILIRAKIS. Rabbi, you are, of course, a rabbi and a leading

citizen of the community area, so I would ask you, the treatment

that you received, is that also available, in your opinion, to others,

based on your personal knowledge?

Rabbi MALAVSKY. Yes. I was just one of the patients. They didn’t

even know who I was.

Mr. BILIRAKIS. They didn’t even know who you were?

Rabbi MALAVSKY. No. It wasn’t until a day later that they were

sort of embarrassed. Did we do all right? Did we take care of you?

Mr. BILIRAKIS. Thank you.

Ms. Canja, in your testimony AARP supported the—and I’m

quoting—‘‘creating of Medicare+Choice in order to accomplish the

objective of expanding choice.’’

Well, now is there an AARP position regarding HCFA’s interpretation of BBA 1997 where they have basically taken, or are contemplating taking $11.2 billion based on their figures, out of the reimbursement picture on Medicare+Choice?

Ms. CANJA. We do support it.

Mr. BILIRAKIS. You support?

Ms. CANJA. We support it because we——

Mr. BILIRAKIS. You support taking the dollars out?

Ms. CANJA. I can’t respond to that part, but we watched what

they were doing, we observed what they were doing, and felt that

it was appropriate, felt that risk adjustment was very appropriate,

and felt that they really did try to meet the concerns of all parties.

So, on that basis, we did support it. We will look carefully at your

concerns and at Congress’ concerns.

Mr. BILIRAKIS. Well, we’re concerned, of course, that some people

don’t have that choice that AARP feels so strongly about; I think

all of us feel strongly about choice, in general.

Are there ways to address and take a look at the risk adjustment

picture and whether or not the way that HCFA is going about it

is the right way and that sort of thing? I suppose there are, but

in the meantime you’ve got an awful lot of people—10,000 in Florida, Ohio and we can go on and on, that are really basically without choice.

And so I would hope that you would—to use Mr. Brown’s term—

deal with the situation at hand, and that is basically people out

there without a choice.

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Ms. CANJA. Our staff is here and has met with your staff, and

I know that they will be very happy to work with you on that.

Mr. BILIRAKIS. Great. We’d appreciate that.

Ms. Ignagni, taking a look at the July 1 information we received

regarding the HMOs dropping from Medicare.

Ms. IGNAGNI. Yes.

Mr. BILIRAKIS. In Florida, one of them is Florida Health Choice,

Inc., in the county of Broward, 256,000-plus Medicare beneficiaries,

121,000 Medicare-plus enrollees. The number of affected enrollees

as a result of their dropping out is 1,659. Their 1999 rate was

$676.64, due to go up—I guess there’s a 2 percent growth—to

$690.17.

Why would they, considering all that, drop out?

Ms. IGNAGNI. It is hard to answer in real terms on the particular

organization you describe and what the dynamic was in that market, but, in general, what we have found in talking with our plans

around the country is that many plans that are now in relatively

higher payment areas are feeling the crunch of many of the aspects

of the Balanced Budget Act formula working together, so that the

effect was, I believe, when you enacted BBA 1997, you didn’t anticipate all of the interactions—no one could have at that time—that

are going on now.

So, for plans that are facing fairly high rates of increase, when

the traditional program this year, for example, is at 5.8, and you’re

down less than 2, because with risk adjustor and the user fee taking out in that county it would be less than 2, then plans are finding it is very hard to contract with providers.

Mr. BILIRAKIS. We’re trying to work on that subject, as you know.

Ms. IGNAGNI. Yes.

Mr. BILIRAKIS. And your people have been cooperative with us.

As Ms. Canja has said, we’ve met with the AARP people, etc.

Ms. IGNAGNI. Yes.

Mr. BILIRAKIS. So we are trying to solve that problem. I received

a 2- or 3- or 4-page letter from Blue Cross/Blue Shield, for instance—I don’t even know if they are in the audience—but they basically said, ‘‘Look, we have the same problems but we’re going to

stay in—’’ in Florida, at least.

Ms. IGNAGNI. Yes.

Mr. BILIRAKIS. I’m not really sure. I don’t have the letter right

here, but I don’t remember whether it was just in Florida or overall. And they’re willing to give us the benefit of the doubt rather

than hurt beneficiaries or put them in fear and that sort of thing.

I’m very disappointed. I mean, you know that. We’ve talked

about it before.

Ms. IGNAGNI. Yes. And in many cases it depends on your contractual relationships with physicians and with hospitals whether or

not——

Mr. BILIRAKIS. Well, I was going to get into that. I think it was

you who testified to that effect about providers.

Ms. IGNAGNI. Yes.

Mr. BILIRAKIS. Some of the problems, may be that a lot of providers are just not wishing to continue because of the——

Ms. IGNAGNI. But they have legitimate concerns, so this isn’t a

case where the health plan arena is saying——

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Mr. BILIRAKIS. Well, my son is a physician, and he doesn’t talk

very much to me, frankly, about any of these problems, but I can

sort of see it.

Ms. IGNAGNI. Yes. I think that what physicians are telling us is

that when they look at the sum total of what they are being asked

to do under this program relative to fee-for-service, given the financial situation, the decline in payments, and the increase in administrative obligations that’s pushed down from HCFA to health

plans to physicians and hospitals, that in many cases they don’t

feel that it is worth their while any more, which really does affect

choice. It affects the entire market.

And this is not a situation that I think we can ignore. It is not

just the health plans. We’re hearing this daily as we go around the

country from physicians and hospitals.

I think they are right. I think these issues are very legitimate.

Mr. BILIRAKIS. Yes, they are.

Now, those notebooks consist of, what, approximately 800 pages,

or more, the regulations?

Ms. IGNAGNI. Yes. The first reg, then there was a mini reg, and

there have been operation policy letters. There have been 42 all

told, so it is almost one every week, and they are about 30 pages

each. So plans are reeling from the impact administratively, and

that is all pushed down to the contract level, at the provider level,

at the hospital level.

So what people are saying is not that we don’t want to participate in a system that is accountable, but let’s look across the spectrum and begin to think about proportional accountability and feefor-service as well as managed care, which has driven down the

regulatory impact on one side, only one side.

And HCFA keeps saying that they’re going to get to it on the

other side, but meanwhile the providers are saying that just

doesn’t make sense, looking at the burden and the obligation.

Mr. BILIRAKIS. All right. Thank you. My time has certain expired.

Mr. Brown?

Mr. BROWN. Thanks, Mr. Chairman.

I was hoping those notebooks would have been cost data that we

have been asking you all for.

First, Mr. Chairman, if I could, I’d like to enter into the record

GAO study, June, 1999, Medicare+Choice Reforms Have Reduced

but Likely Not Eliminated——

Mr. BILIRAKIS. Without objection.

[The information referred to follows:]

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Mr. BROWN. Based on this document—and, I mean, it is pretty

clear that there is a significant body of evidence that some HMOs

are continuing to be overpaid. As you recall, Dr. Moon, prior to the

BBA of 1997, the GAO stated that we were overpaying managed

care plans significantly, but that seems perhaps to have gotten better but not significantly better.

There was a—the document from the SEC, from the Securities

Exchange Commission, states about one managed care company

has done particularly well. Their filings as a result of the premiums differences, the Secure Horizons program, accounted for approximately 59 percent of our—document from the company,

itself—‘‘59 percent of our consolidated premium revenue for the

year ended December 31, 1998, an even larger percentage of our

operating profit, even though it represented only 28 percent of our

total membership.’’

So this company, 59 percent of its revenue profits and large percentage of its profits came from 28 percent of its total membership,

moneys paid by HCFA.

What does this tell us about overpay? Could you talk about how,

even with the BBA of 1997, how overpayment has continued?

Ms. MOON. The issue of overpayment I believe is very closely related to the question of who enrolls in managed care plans. And,

as Karen Ignagni pointed out earlier, plans that have, for example,

patients that have stayed in for a number of years and are older

and have more health care problems are probably closer to the average Medicare beneficiary population, but there are many plans

that have a much healthier population. It’s not just age, it’s not

just the basic characteristics, it really is the question of what are

the needs of the people that are in those plans.

That’s one of the reasons why I think that risk adjustment is an

extremely important way of leveling the playing field in terms of

payments to plans.

That really has driven a lot of the differential over time, as well

as some other differences, so I think that one of the key questions

is, how do you find reasonable ways to deal with overpayment, recognizing that it is not uniform? It certainly, as other people have

pointed out, varies a lot, and in some places will be extremely high

and other places probably managed care plans are being paid correctly, and in some cases they probably have a case for some higher

payment.

One of my concerns is an across-the-board remedy that ignores,

I think, some of these important differences.

Mr. BROWN. Is there any way to pay managed care plans appropriately without risk adjusting?

Ms. MOON. I don’t believe there is, and I think it is going to be

a continued struggle to find a good risk adjustment mechanism.

We’re not there yet. It is going to be clearly a problem as long as

the incentive is there where, if plans can make money by attracting

good risks, that’s not a healthy situation either for plans, for Medicare, or for beneficiaries. What you’d really like to do is see a world

in which the advantages of coordination of care, which I think can

be substantial for sicker patients, are truly rewarded in the

Medicare+Choice program.

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Mr. BROWN. So you could do that through risk adjusting. And

can you do it other ways? What other mechanisms do we use to

match that more appropriately?

Ms. MOON. There are other issues, I think, that are clearly important in terms of a good, balanced structure. One that the Medicare program now has is a requirement that managed care plans

take people who want to enroll in them. You want to have everyone

have access to the plan and not deny them, and that does not seem

to be a problem.

I think standardization of benefits, at least some critical benefits

like prescription drugs, are also very important. Prescription drugs

are an interesting dilemma because managed care plans I think

are kind of caught here.

Right now, if they offer very generous prescription drug benefits,

they may attract a sicker population and that may cause them to

back off from that, as we’ve seen in terms of caps on the prescription drug coverage being very extensively used by managed care

plans.

Mr. BROWN. The plans are saying—Mr. Chairman, one more

question—the plans are saying, Dr. Moon, that they are getting

$11 billion in cuts from risk adjustment. Is that only if they keep

the same mix of enrollees that is sort of—the mix is tilted toward

more-healthy beneficiaries?

Ms. MOON. That’s my understanding of how that $11 billion

works. I have to say I haven’t gone and analyzed this in detail, and

I think it is important to monitor this carefully.

But if you have an average mix of patients that look like the

Medicare population, in general, in terms of health status, then

plans should be budget neutral.

If plans start out with a much healthier mix of people, then it

seems to me you don’t want to have budget neutrality; you would

want to make sure that your risk adjustment mechanism is

ratcheting down.

So I think it needs careful monitoring, but I think there is nothing magic, necessarily, about a budget neutral risk adjustor. In

fact, it may not be a good way to go.

Mr. BROWN. Thank you.

I think, Mr. Chairman, that’s exactly the point. If risk adjustment means major cuts to plans, it means it is because those plans,

by and large, were cream skimming, were attracting healthier

beneficiaries.

If they have more of a cross-section of—as Dr. Moon said, if they

have more of a cross-section of enrollees, then pretty clearly, by

definition, it is going to be revenue neutral, they’re not going to

face those cuts.

Thanks.

Mr. BILIRAKIS. I thank you.

Mr. Bryant?

Mr. BRYANT. Thank you, Mr. Chairman.

I want to thank our very qualified panel. I appreciated your testimony.

Let me ask, Mr. Powell, on behalf of the Senior Coalition, I take

it you are supportive of this budget neutral arrangement where we

don’t lose the $11 billion, $11.2 billion?

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Mr. POWELL. That’s correct. Yes.

Mr. BRYANT. Ms. Canja, the AARP—for which I qualified this

year and got your very kind invitation—you have a different view

of that, and I’m not sure I agree with that, but at this point you

are saying that you are comfortable with the potential for the cuts

of $11.2 billion?

Ms. CANJA. As I said, we have supported, after observing what

HCFA was doing, we did support the action. In listening to the conversation, it does make sense that those that did not have beneficiaries who were sicker or more frail, or whatever, and needed

more care, they would not benefit from risk adjustment.

But I still say that we have our staff here and they’ve been working with the committee and will do so.

Mr. BRYANT. Thank you.

Ms. Ignagni, did I understand you correctly that the fee-for-service, do they get an increase of 5.8 percent——

Ms. IGNAGNI. Yes, sir.

Mr. BRYANT. [continuing] per year, or is that 2 years?

Ms. IGNAGNI. No, that’s per year.

Mr. BRYANT. Per year?

Ms. IGNAGNI. For this year coming up.

Mr. BRYANT. As contrasted to the 2 percent that managed

care——

Ms. IGNAGNI. In many communities.

Mr. BRYANT. Right.

Ms. IGNAGNI. And in some communities it is below 2.

Mr. BRYANT. And also you industry is subject to those regulations.

Ms. IGNAGNI. Yes, sir.

Mr. BRYANT. I mentioned those to the first panel, the 800 pages,

the 42 letters, and that the fee-for-service is not subject to all that?

Ms. IGNAGNI. That’s right.

Mr. BRYANT. I know several panelists have mentioned—even the

first panelist mentioned this playing on a level field, and that’s a

key phrase I’ve picked up in Washington. Everybody wants a level

playing field, like don’t let the good be the enemy of the perfect.

That means you’re about to get it, I think. And the level playing

field, I’m not sure what that means.

But, you know, just those two items, alone—the rate of increase

a year and the amount of regulation—doesn’t seem to be very level

to me.

I’m concerned about the rural areas of Tennessee. I represent a

very urban part of Shelby County and Memphis, but I also have

14 counties that are less urban, more rural, and the fact that some

of the people in the Medicare+Choice groups have moved out of

Tennessee.

The first panelist mentioned that we’re subject to a lower rate in

Tennessee, and Dr. Ganske mentioned Iowa the same way.

I want this choice available for my constituents in Tennessee,

and I’m concerned. How do we get that? Is it by cutting $11.2 billion from the program?

Ms. IGNAGNI. I think if you proceed forward with risk adjustor,

what you have done is you’ve created a hospital adjustor. That’s all

it is. As you get into the issue and you look at it, I’m not sure that

103

any economist, as they study this—you use the weights in the feefor-service system to develop this risk adjustor, which completely

devalues any type of care for the chronically ill that has been provided on an outpatient basis.

So, to the extent the rabbi would receive congestive heart treatment on an outpatient basis, no credit for that.

I’ve just come from a diabetes conference, 500 people in Washington in August—no credit for that on an outpatient basis—only

if you hospitalize, and only if you hospitalize for more than 1 day.

I think there are very legitimate technical issues. We’ve been in

long conversations with HCFA. I do believe they agree with many

of the technical concerns.

Many individuals have said it was the best they could do. It’s not

adequate. You voted on $22 billion of cuts in this sector. It is adding another 11.5—further and further developing the problems associated.

In your area—I have a run of all the members and what the situation would be in each of their counties—there is only one county

in your area which would receive an increase over 100 percent, and

that’s a very rural county where you only have two enrollees. In

every other county you’re down in very, very significant terms relative to fee-for-service, so it explains precisely why there is not the

purchasing power adequacy to continue to operate this program

over time.

And so you are right to ask the question, you’re right to be concerned, and I think that that’s really what the task of this committee is going to be—and it is tough. There’s no question about

it—to look through all these issues, but look at the purchasing

power adequacy.

Mr. BRYANT. If I might just close quickly with a statement, I

know whether it is Medicare+Choice or whether it is fee-for-service,

I will reiterate, as I did with the first panel, that the health care

providers, the doctors, the hospitals in my District, are very, very

concerned about what they are being paid already and how far they

have been cut.

Ms. IGNAGNI. Yes, I know. Right.

Mr. BRYANT. And they are just—and the amount of paperwork

they have to go through.

Ms. IGNAGNI. Right.

Mr. BRYANT. I yield back the time.

Mr. BILIRAKIS. Mr. Deutsch?

Mr. DEUTSCH. Thank you, Mr. Chairman.

Ms. Ignagni, if you could follow up on what you just said, and

maybe try to be a little bit clearer on it, that the risk adjustment,

in fact, if we look at what HMOs, in general, are trying to do,

they’re trying to be more efficient and literally keep people out of

the hospitals, do more operations when it is more efficient, do

shorter hospital stays when it could be more efficient. So just, at

a practical—I mean, this concept is a wonderful sort of concept,

and I agree completely with what Dr. Moon said that ultimately

that’s really how you theoretically have to go.

Ms. IGNAGNI. Right.

Mr. DEUTSCH. I mean, in this perfect world, people are to be reimbursed for how much it should theoretically cost you to treat

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them, sort of a DRG-type system. But at the practical level, you

know, can you elaborate a little bit on what this risk adjustor we

are actually using does and how, in a sense, it unfairly penalizes

people who are being efficient.

Ms. IGNAGNI. It completely turns on its head all of the progress

that has been made over the last 10 years to treat the chronically

ill on an outpatient basis, because plans who are doing that would

receive no extra payment, so it completely devalues what we have

accomplished in terms of care management and what the literature

says is a more-productive way to go about treating people.

I think that many haven’t had the opportunity to look into the

details of this to see that, in fact, what you have here is a hospital

adjustor. You don’t have a risk adjustor. We’ve gone beyond that

in our delivery system. The fee-for-service system has to catch up.

Building a risk adjustment system based on fee-for-service makes

no sense whatsoever.

Mr. DEUTSCH. Dr. Moon, could you follow up, just in terms of the

status of it, in terms of the incentives and everything else?

Ms. MOON. The goal of a risk adjustment mechanism is to try to

find a way to adjust for differences in health status, and Karen is

quite right that this particular system is not an ideal system, and

I think almost everyone believes it is an interim approach.

There is a certain dilemma here. Part of the problem is that it

is based on fee-for-service information because we don’t have a clue

what is going on in managed care plans, and we need information

on that, and that has not been an area that has been possible to

get information from.

But it is also the case and my understanding is that, on average,

this does a better job of adjusting for differences in health status,

and so it is a step in the right direction.

The current system we have is totally inadequate. This is a little

less inadequate. And then the ideal is to move further into the direction.

I don’t believe it has an incentive for hospitalization, however.

Mr. DEUTSCH. Okay. Let me—there are two other areas that I

want to at least touch on in the 5 minutes. Congressman Brown

talked about, I guess theoretically, the idea that the $11.2 billion

savings wouldn’t be as large if it turns out that HMOs are treating

sicker people or not-healthier people.

I mean, is there any indication, you know, the percentage of

healthy people, the percentage that we have statistical data that

we can look at in terms of people who are in HMOs today, percentage-wise, healthier versus the average Medicare population, Ms.

Ignagni?

Ms. IGNAGNI. No. In fact, all the data that we have are very old

and reflect what was going on in the delivery system in the early

1990’s.

The PPRC data, which is 1995 data published in 1996 that was

made reference to this morning, actually shows that there was

quite a great deal of catch-up in the Medicare+Choice plan—then

it was Medicare risk—relative to the early days of the 1990’s, and

you weren’t seeing those broad differences that were indicated by

the Mathetmatica Corporation when they did their original research.

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We don’t have data today, and this is the problem. I would just

urge you to consider what’s going on in the market as a proxy for

what may be totally inadequate with results of this formula and its

implementation.

Mr. DEUTSCH. So, again, we’re talking about these risk adjustment and the savings really based upon no practical—I mean, is

that fair?

Ms. IGNAGNI. No. HCFA published a table. Here it is, Health

Care Financing Administration. Virtually no plan receives any

credit under the risk adjustor analysis that was done in the proposal developed by HCFA. This was distributed by HCFA several

months ago in the spring, and it indicates exactly what we’re saying—that the entire risk adjustment proposal that was developed

by HCFA, not written by this Congress but developed by HCFA, is

totally based on whether or not you hospitalize a patient, because

you don’t get any credit for any of the chronically ill programs

you’re running on an outpatient basis.

Mr. DEUTSCH. Which really does seem like a fundamental——

Ms. IGNAGNI. It turns the whole thing on its head, and I can’t

imagine that beneficiaries, when they find out about how this

works, would be supportive of that.

Mr. DEUTSCH. Mr. Chairman, if I can just have one last question.

The last question relates to this whole issue of, you know, how

much savings or what’s the reimbursement level that Medicare

HMOs are getting relative to the average cost of fee-for-service

beneficiaries?

We’ve heard numbers from 95 percent to 80 percent, which, you

know, if we’re talking about billions of dollars, is a huge difference—I mean, literally shooting in the middle of nowhere.

And it does seem to be a fundamental issue, that if we’re talking

about, you know, 95 percent reimbursement versus 80 percent reimbursement, you know, it is a totally different—I mean, again,

you know, who—Dr. Moon or Ms. Ignagni or Mr. Powell, if anyone

specifically can get at that, I mean, it just seems like such a significant issue that we’re all over the map in terms of numbers we’re

hearing.

Ms. MOON. I think one of the important things to think about are

what pieces of that differential you believe are indications of things

that the managed care plans should be paid.

Two of them have been talked about, and I think that they are

two of the important ones that you need to evaluate. The one is the

issue of graduate medical education and the differential that that

is involved there.

The question is whether or not the payments for graduate medical education should go to managed care plans, and then whether

or not they’re finding their way into graduate medical education.

And another difference is this issue of risk adjustment, which I

think, as has been pointed out here, is highly controversial.

Ms. IGNAGNI. I don’t see it that way. I have long and deep respect for Marilyn’s work and would be happy to spend some time

talking about the methodology. Graduate medical education was

clearly backed out of the payment, No. 1, so health plans don’t receive that.

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In terms of the risk adjustor, from the CBO, everyone, in terms

of looking at the legislative history, it was clear that that was intended to be budget neutral. Only HCFA seems to believe that it

wasn’t.

The fact is a cut is a cut.

Mr. Brown has made the point several times that he hasn’t felt

that we have done well enough in terms of explaining our methodology. We have been up here a number of times, but if it hasn’t

been enough I make a personal promise that we will bring up the

actuaries, we will go through every aspect of the methodology.

What we have intended this is to provide you data that would

be worthwhile data, would be honest data, and we could have a discussion, because from the beginning we thought that this was

going to be bipartisan consideration and people would feel very concerned about the effects on their beneficiaries.

Mr. Green was probing with Dr. Berenson earlier about what

was happening in your area. You will be interested to know that

you are down at 75 percent of fee-for-service by 2004, and you have

28 percent of your beneficiaries, Medicare beneficiaries in

Medicare+Choice. You can’t run a program with that level of resources. You can’t run the traditional program, let alone the additional benefits.

So we would be happy to do whatever it takes to satisfy Members

that they have a chance to look at these numbers.

Mr. BILIRAKIS. Mr. Burr?

Mr. BURR. Thank you, Mr. Chairman. I don’t even know where

to start.

Let me just ask the whole panel: does anybody believe we will

ever get this right?

[No response.]

Mr. BURR. I’ll take that as a no from everybody. I share your answer.

Let me just make a reference, for purposes of the discussion you

were just in, part of BBA 1997 was a phase-out of graduate medical education.

Ms. IGNAGNI. That’s right.

Mr. BURR. And so that, I think, is on schedule. But in that set

of BBA issues that were addressed in the CBO testimony in front

of the Senate, it said those policies reduced the cumulative growth

in Medicare+Choice rates relative to fee-for-service payments by 6

percent.

It went on to talk about the risk adjustor, and it basically says

that the first stage of the risk adjustor would be based on the use

of inpatient hospital services by individual enrollees. That change

would reduce payments for existing enrollees by 7.6 percent when

fully phased in by 2004.

The administration also announced a second stage of the risk adjustment that would be based on the use of services in all settings.

The administration expects that such an adjustment would reduce

payments by another 7.5 percent beginning in 2004.

If both plans are implemented as announced, the combined effect

could reduce payments by 15 percent, plus 6 percent. My math tells

me that’s a 21 percent reduction based upon what is already in

place.

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So let me, if I could, just ask this question. What would entice

a healthy person to enter a Medicare+Choice plan?

Ms. MOON. I believe that one of the things that beneficiaries

have said over and over again, that the reason that they are initially attracted to those plans are the additional benefits that are

being promised in these plans.

I think there is fundamentally, however, a misunderstanding by

beneficiaries of whether or not this is a permanent promise in the

same sense that the traditional benefits or the basic benefit package is promised.

Mr. BURR. What would be the attraction for a sick person?

Ms. IGNAGNI. Broader benefits.

Mr. BURR. Broader benefits?

Ms. IGNAGNI. Lower costs, catastrophic coverage.

Mr. BURR. No deductibles?

Ms. IGNAGNI. No deductibles, very limited co-pays.

Mr. BURR. Less out-of-pocket expense. I think the rabbi covered

a number of them.

Aren’t there, in fact, many more benefits——

Ms. IGNAGNI. Yes.

Mr. BURR. [continuing] for somebody who is sick——

Ms. IGNAGNI. Yes.

Mr. BURR. [continuing] than somebody that’s well? I mean, when

we look at private sector insurance, the well ones don’t want anything to do with the system. They want to pay for it out of pocket

because they don’t feel that they’re going to go to the doctor, they

don’t feel that they’re going to be sick, they don’t feel that they’ll

go to the hospital.

Seniors who are sick fear that they are going to go to the hospital, and they know—is it Canja?

Ms. CANJA. Canja.

Mr. BURR. [continuing] It is $760 out of pocket up front, isn’t it?

I mean, that’s the Medicare deductible for hospitalization.

Ms. CANJA. That’s the Medicare deductible. If they have

Medigap, they are paying Medigap and they feel protected.

Mr. BURR. Do all of them have Medigap?

Ms. CANJA. I don’t know the number, but I think many of them

do.

Mr. BURR. But there’s——

Ms. CANJA. They have fee-for-service.

Mr. BURR. [continuing] a pretty good share. So, in fact, the statement that everybody that is in managed care or Medicare+Choice

is healthy is wrong. Does anybody dispute that? I mean, there are

sick people in Medicare+Choice.

Let me ask you, Ms. Canja, because I think you alluded to it earlier, do you think that one of the core benefits of Medicare should

be drug coverage?

Ms. CANJA. Definitely. We strongly believe that prescription

drugs are part of modern medicine and really should be available

to all Medicare beneficiaries.

Mr. BURR. Do you think it is fair to ask seniors in the country

to make a premium payment for drug coverage with no stop-loss

on it? In other words, in the President’s proposal it says, ‘‘We’ll pay

50 cents of every dollar from some point to $2,000, but if you have

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over $2,000 a year in drug costs it is 100 percent you.’’ Have you

ever seen an insurance policy where at some point it became 100

percent the sick person?

Ms. CANJA. I just know all the people that are out there that

don’t have coverage right now, and it is 100 percent them right

now, and they are paying.

You know, we hear the figure that 65 percent have prescription

drug coverage now, but the truth is that they are very vulnerable

and they have very little coverage.

Mr. BURR. I agree. We should supply a drug benefit, but my

question, I guess to the panel, Should we take those individuals

who have $2,000-plus in drug coverage and say, ‘‘After 2,000 you

are on your own. It’s out of your pocket,’’ or should we provide

them a policy that says, ‘‘At 2,000 we pick up 100 percent, not

you’’? I mean, aren’t those the ones that are most at risk? Aren’t

those the ones that would be classified in that definition of sick?

Wouldn’t you agree?

Ms. MOON. Congressman, I agree with you, and I would much

prefer to see a drug policy that had the stop-loss kinds of protections that you are talking about, but I would point out that the

vast majority, for example, of drug benefits that are now available

in managed care plans under Medicare have caps, and many of

them lower than $2,000.

Mr. BURR. I think what all of you have made is really an impassioned argument about why we can do much better than we have

today.

The rabbi is extremely pleased with his managed care coverage.

I am, too. I’ve never had a problem with it.

We may live in exceptional parts of the country, we may have exceptional doctors, we may not have what everybody else has, but

I believe that there are more people that are like you and me, and

we’re not the exceptions.

Clearly, we can do better in the structure, but there is one thing

that I know that will stymie this—if we drive competition away.

The challenge for Congress, and I think for what every witness

has suggested, is not less competition, it’s more competition. It is

to create a field—Mr. Bryant said it best. He said everybody is

after a level playing field. Well, let me suggest to you that we’ve

had a big discussion on risk adjustors today. Most of the people

who testified to the Medicare Commission said risk adjustors are

almost impossible to find a good one. That’s what the Medicare

Commission said. They suggested possibly a Medicare Board could

help.

I’m hopeful that, as we move forward this calendar year, that not

only can we solve the current problem but we can also address

what the solution is to health care for seniors with a plan that

makes sense, a plan that addresses the needs that are out there,

a plan where we don’t spend every 6 months questioning whether

somebody is underpaid or overpaid, who cheats and who doesn’t,

but a plan where we have confidence that when we need it, it is

there, and that we’re getting the most bang for our buck.

I thank all of you for your willingness to come testify, and I yield

back.

Mr. BILIRAKIS. I thank the gentleman.

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I would only add to that that we’re not going to get the job done

or do a good job if we are not open-minded, if we have preconceived

biases, and that has been some of the problems that we have had,

unfortunately.

Mr. Green?

Mr. GREEN. Thank you, Mr. Chairman.

Mr. Powell, let me follow up on what my colleague from Ohio,

Mr. Brown, talked about.

Do you agree with Dr. Moon’s characterization of that $11.2 billion as not really a cut; it depends on if you treat people in your

HMO that have an average, much better health than the others,

than the general population, that 11.2 is not a cut, you have to actually earn that 11.2 to lose that money?

Mr. POWELL. No. The Seniors Coalition would not take that position. We would consider and we do consider the $11 billion a cut,

and for precisely some of the reasons that Ms. Ignagni has spoken

to, and that is the lack of—and this alludes to my testimony—the

lack of outpatient care, primarily in the risk adjustor.

Mr. GREEN. Okay. But it is not a cut unless you—and you are

disagreeing with the formula on outpatient, and I could agree that

that formula should be in place earlier.

I know we received a lot of cards in our office, like a lot of folks,

on the $11.2 billion cut, and we first looked to see what we’re doing

to Medicare and found out that it was a formula that HCFA is

doing, you know, without that, and there is no act of this House

that would actually cut 11.2 out of Medicare this year or next year

or even the year after that. It is all in relation to the Balanced

Budget Act.

Mr. POWELL. Yes.

Mr. GREEN. Okay. Ms. Moon, in your testimony you suggest that

disruptions created by the plan withdrawal should not only be expected by accepted as part of the competitive process, and you also

imply that Medicare HMO reimbursements have come more into

line with the actual cost of caring for the enrollees. The extra benefits, such as prescription drugs, could likely be reduced, as well.

If this happens, what, if any, incentive will seniors have to elect

a Medicare HMO? After all, under the current system a Medicare

HMO appears to be a more-risky selection for a senior looking to

receive both consistent and uninterrupted care.

Ms. MOON. I think you ask a very good question, because I think

that it is a very difficult thing for someone who thinks of herself

as a supporter of beneficiaries to be sitting in front of you and saying, ‘‘Maybe we should think about something that is going to

eliminate some benefits that they receive.’’

My biggest concern is a fairness issue between what is available

to people in fee-for-service and what is available to people in managed care plans and whether it comes out because of overpayment.

If managed care plans could be paid what these folks would cost

in fee-for-service and achieve other savings, then I wouldn’t have

a problem.

I think the reason that people might still choose managed care

is that there are people out there who like that arrangement, who

find it extremely desirable, as the rabbi talked about, and, in exchange, they get and should expect to get, I believe, big reductions

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in deductibles and cost sharing, because that’s really the tradeoff.

The issue is you’re agreeing to let the managed care plan put some

additional controls on you in terms of who you visit and how you

get care in exchange for the lower deductibles and cost sharing,

and that seems to me that’s the most important tradeoff you’ve got

to make sure is there.

The extra benefits are attractions to beneficiaries, and the question is whether or not they are being financed by overpayments,

and I think that’s a very hard issue to deal with.

Mr. GREEN. Thank you.

For everybody on the panel—and I know, since you mentioned

Houston area, we have an unusual situation where a lot of our

HMOs are actually merging in taking market and trading market,

almost like Time Warner did with TCI. They traded the Houston

market for the Dallas market so they could consolidate, and that’s

what is happening in Houston. In fact, I think there is a question

of one of the mergers, the number of mergers now is 65 percent of

Medicare HMOs will be under one company, and there was a question about that.

The 70,000 that we talk about in the testimony that will not

have access to an HMO, do we have a breakdown on rural/urban

for that 70,000? Do you know off the top of your head? Is it equally

applied in rural and urban areas? Is it more likely in rural areas?

Ms. IGNAGNI. I know you’re not going to believe this—with all of

the material that we brought, we didn’t bring that chart. We looked

at so many counties around the country. In fact, I was just in

Houston on Monday with a group of beneficiaries who are very,

very concerned about what may happen if this problem isn’t addressed. But we would be delighted to get back to you this afternoon. I’m sorry I didn’t bring that chart.

Mr. GREEN. Thank you, Mr. Chairman.

Are we going to have a second round?

Mr. BILIRAKIS. Preferably not, but, I mean, if the 4 or 5 of us left

here——

Mr. GREEN. I have one more question.

Mr. BILIRAKIS. One more question.

Mr. GREEN. Mr. Chairman, I appreciate the chance to ask this,

because I know this is—it’s related to HMOs, and, in fact, I almost

wish Dr. Colburn was here.

Ms. Ignagni, last week I saw an article in the ‘‘Washington Post’’

that talked about a certain health care provision that—let’s see,

Dr. Colburn was quoted in here about he knew of an obstetrician

in Muskogee who is exposed to—his patient was exposed to chicken

pox virus, and the doctor prescribed a $700 injection for antiserum, but the insurance company refused, even though she had

obstetric care.

Your quote in here was that, for example, ‘‘They didn’t say so directly, they implied that the doctor’s personal experience had been

skewed in views of the industry.’’ And you say that the real problem is that the employer didn’t buy a plan that approved of that

particular treatment.

Believe me, you have some sympathetic folks up here who realize

the press takes one statement out of context, but in my experience

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ance for a company, I never got into whether they gave a shot for

something or not. It was obviously we were shopping for the best

deal for my employees and for the company.

Do you know of anybody that would know you didn’t have this

shot that was medically necessary?

Ms. IGNAGNI. Actually, there’s a whole range of issues subsumed

in your question. I’ll deal with it as directly as I can.

As you know, employers make decisions about whether they are

going to buy particular riders, experimental procedures, and more

increasingly now for particular pharmaceutical and prescription

therapies that’s in the premium or outside, you buy it, etc.

I think that one of the points that I was making to that reporter—and I appreciate what you’ve observed—I think, you know,

oftentimes people reduce to lowest common denominator a particular point. That the issue of medical necessity is far more complicated than really the discussions would suggest, and I think that

we have to back up and look more broadly at where first-level decisions about coverage are made, how they are made, why they are

made, and then where do we go from there in terms of medical necessity, and then bringing in information with respect to clinical

trials and best practice and matching that with physician recommendations.

It was a very long discussion that got distilled to two lines, I

think.

Mr. GREEN. I guess what bothers me in the umbrella debate on

managed care that Medicare is just a part of, that to say that an

employer refused to buy a certain benefit for, you know, for a chicken pox virus that a child or a mother was exposed to, I think that

was a bad rap on employers, because I have yet to have experience

with an employer who had that specificity on some type of thing.

Again, I understand newspaper articles aren’t always factual,

and that’s what bothered me in the umbrella debate.

Ms. IGNAGNI. And I appreciate what you say and your point is

very well taken.

I was just going to say, Mr. Chairman——

Mr. BILIRAKIS. Very briefly.

Ms. IGNAGNI. [continuing] that we were talking for a good deal

of time about how first-order decisions are made and where they

are made. The reporter thought that health plans were making all

of these decisions, so I was endeavoring to back up and talk about

what the purchaser does, what that role is, what the health plan

role is, what the physician role is, and how it all comes together.

I see by your reaction that I probably did a miserable job at it,

so I appreciate your admonition.

Mr. BILIRAKIS. Mr. Barrett?

Mr. GREEN. Thank you, Mr. Chairman.

Mr. BARRETT. Thank you, Mr. Chairman.

One of the disadvantages or advantages of being last is you get

a lot of time to think about things.

I’m thinking about what is going on right now in the Ways and

Means Committee, and the negotiators have just reached this

agreement on the $792 billion tax cut. We’re doing the appropriations bills. And, as I just left, the subcommittee Chair was talking

about how austere it was.

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Mr. Powell, I associate with the Seniors Coalition being closely

allied, frankly, with the republican party.

Mr. POWELL. We’re nonpartisan on——

Mr. BARRETT. I understand. I understand. And AARP is not partisan and they’re not associated with democrats. I understand how

both of those work.

Where is this $11.2 billion coming from again?

Mr. POWELL. From our understanding, the $11.2 billion——

Mr. BARRETT. No. You’re saying it is a cut. I’m accepting it. How

do we make it up?

Mr. POWELL. Well, I think the first thing we do is examine the

chairman’s bill, No. 1, which would bring into budget neutrality the

risk adjustment.

Mr. BARRETT. Very good, $11.2 billion we just spent. And if we

pass this bill and there is no longer an $11.2 billion cut, it is revenue neutral, we just raised spending $11.2 billion.

Mr. POWELL. We maintain projected spending.

Mr. BARRETT. Okay. But if there is a $11.2 billion cut and we get

rid of that, that means we’re getting $11.2 billion from somewhere.

I’m just thinking a little mathematically here. Are you with me?

Mr. POWELL. Yes.

Mr. BARRETT. Okay. So I’m accepting the cut.

Mr. POWELL. Okay.

Mr. BARRETT. Are you saying we should cut other programs?

Mr. POWELL. I don’t think it is an either/or decision.

Mr. BARRETT. What are you talking about? If you’re saying

there’s an $11.2 billion cut, we either raise taxes, cut other programs, or add to the deficit. Take your pick.

Mr. POWELL. Well, those are three very sad choices, and I——

Mr. BARRETT. I know, but you’re the one saying there is a cut,

and I’m just asking you, if we want to address your problem, help

me. Which one should we do?

Mr. POWELL. If we were to look at what we see as a projected

cut through the risk adjustor and the Medicare program, it is

merely that at this point.

Mr. BARRETT. I’m accepting that. You said it was a cut. You said

to Mr. Green it’s a cut. I’m accepting that.

Mr. POWELL. Yes.

Mr. BARRETT. I’m just asking a simple question—deficit spending, other cuts in other programs, or tax increase.

Mr. POWELL. Well, we’re going to oppose any kind of tax—point

well made.

Mr. BARRETT. Okay. And I have to say, Ms. Ignagni, I respect

you, I listened to you, and I thought back to a conversation I had

with a hospital in my District, hospital administrator, and, as all

of us know, you’re not the first ones in the line here—nursing

homes, occupational therapy, physical therapy, home health care,

outpatient services, inpatient services, you name it.

And, as I tell all of them, there’s more to come. We’re paying for

this beautiful tax cut. There is more to come.

But, as I was talking to the hospital administrator, he was telling me how bad the Medicare reimbursement rates were, and he

said, ‘‘You know, it’s almost getting as low as HMO.’’ And I nodded

my head. And I said, ‘‘Let me make sure I understand this. You’re

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saying that Medicare pays more than HMO?’’ And he said, ‘‘That’s

right.’’

My question to you: are we overpaying the hospital?

Ms. IGNAGNI. I don’t know.

Mr. BARRETT. Are we subsidizing—if it is a competition market

and HMOs are paying less than Medicare, shouldn’t Medicare be

reducing its payments to come in line with HMOs, or are we subsidizing you?

Ms. IGNAGNI. I think what we’ve done in our delivery system on

the fee-for-service side is that fee-for-service hasn’t put in play the

types of forces that managed care has. We’ve driven consolidation

in some parts, and if the entire delivery system were a competitive

one we would have far more and far fewer hospitals and hospital

beds, particularly unused hospital beds, than we have now. We’d

have a different distribution of physicians, etc.

So in many ways the traditional program, because of its fee-forservice nature, subsidizes inefficiency where there is inefficiency.

But, having said that, that’s in the eye of the beholder. I’ve also

been in some communities, even though there have been three hospitals there, they fought very passionately to keep the third hospital, so I understand precisely what you’re saying.

I think it is very hard to sort through all of this. We’re not testifying before you today to say, ‘‘Help us at the expense of everyone

else.’’

Mr. BARRETT. I understand that.

Ms. IGNAGNI. Other aspects, other entities within the delivery

system have made rational and real observations about the effects

of BBA. What I would say to you is that I think that there is compelling reason to ‘‘T’’ up this as an issue this fall, take action now

before we have more of the kinds of effects you’re——

Mr. BARRETT. But you’re also sophisticated enough to know,

again, that you’re not the only one standing in this line.

Ms. IGNAGNI. Precisely, and I’m not going to run down the other

guys, either.

Mr. BARRETT. But my point is that if we’re going to throw $11.2

billion back into the HMOs and I go back to the hospitals and say,

‘‘The money is gone,’’ and he’s saying, ‘‘Well, wait a minute,’’ the

reality is that—and this was his complaint. His complaint was that

there’s not enough money in Medicare reimbursement to continue

the subsidy of HMO payments, which blew my mind that somehow

Medicare is supposed to subsidize HMO payments because HMO

payments are too low.

If I could have just a minute, Mr. Chairman, as well—the whole

issue of drug coverage—I just have to touch on that very quickly.

Ms. Moon, I’ll ask you, because I’ve heard, again, some of my colleagues here in Congress say, ‘‘Well, there’s no problem here. Twothirds of the American people have drug coverage.’’ I think both

Mr. Armey and Mr. DeLay I think we’ve seen on television saying,

‘‘We don’t have to expand Medicare coverage of drugs.’’

From your perspective, how solid is this drug coverage?

Ms. MOON. From my perspective, I think that we’re talking much

more about a base of about 40 percent of the people having pretty

good prescription drug coverage, the bulk of those people being

folks who have good employer-based coverage and the folks who

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have Medicaid. So Medicaid is already a public expenditure, and if

you replace Medicare with Medicaid, there would, to some extent,

just be a tradeoff.

So I think that it is much thinner than people talk about, both

in terms of the extensiveness of the coverage and what is happening in terms of things like affordability of Medigap coverage to

people who buy prescription drug benefits.

And, as I indicated before, the caps in HMO plans are often substantially tougher than the caps that were in the administration’s

proposal.

Mr. BARRETT. Thank you.

Mr. Chairman, I would just ask unanimous consent that—I have

a document here on the President’s health care, his Medicare plan

prescription coverage.

Mr. BILIRAKIS. Without objection.

Mr. BARRETT. Thank you.

[The information referred to follows:]

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Mr. BILIRAKIS. Mr. Brown would like to——

Mr. BROWN. Mr. Chairman, I just want to make a comment. I

was a little confused. I’ve heard during this hearing that managed

care companies are only going to experience a 2 percent increase

next year, and I was looking through Dr. Berenson’s testimony. He

said under the BBA system a rate for a particular county is the

greater of three possible rates—a new minimum or floor payment,

a minimum 2 percent increase over the previous year’s rate, or a

blend of the county rate and an input price adjusted national rate. Now, we had heard that the amount was only going to go up 2

percent next year. Well, 2 percent is the absolute minimum for any

managed care plan. He then goes on—and I’ll conclude quickly, Mr. Chairman—in

his testimony, ‘‘Payment is rising in all counties this coming year

by an average of 5 percent, and in some areas will rise by as much

as 18 percent—’’ payment to managed care companies. ‘‘The BBA payment reforms were designed to increase payment

in counties that had the lowest rates and therefore the fewest number of plans, yet counties—’’ and this is perhaps the most important part ‘‘yet counties receiving the largest increase under the

BBA system are experiencing the most disruption, dropping the

most beneficiaries.’’

Plan withdrawals are affecting 11 percent of enrollees in counties

where rates are rising by 10 percent, the highest, 11 percent withdrawals there, but affecting only 2 percent of enrollees where rates

are rising by just 2 percent. So it is hard to sort of juxtapose that and understand, when

some people here have claimed that the increase is only 2 percent.

It’s 5 percent average, as much as 18 some places, and that’s not

really what is causing the dropping, the withdrawing of plans. Mr. BILIRAKIS. Why don’t we finish up with a response from Ms.

Ignagni regarding that. Ms. IGNAGNI. And I’ll be very quick, Mr. Chairman. Mr. Brown, HCFA has often observed and made the case this

isn’t a pervasive problem because the rate of increase, on average—

frequently the qualifier ‘‘on average’’ is not inserted in either testimony or observations. Here’s what’s wrong with that. Of the beneficiaries, 78 percent

now are in counties that are going to get less than 4 percent. And

I said to you earlier in my oral statement that 38 percent of the

beneficiaries are in counties that are going to get 2 percent. There

is only one county in the United States that would get 18 percent—

it’s actually 17.8 percent—and there are no Medicare risk enrollees

living there. In fact, there are only 208 beneficiaries overall. We have a run of——

Mr. BILIRAKIS. Dr. Berenson didn’t tell us the truth?

Ms. IGNAGNI. I think that Dr. Berenson probably was looking at

the broad issue of 5 percent, which is the average of where you

begin. It’s 5.8 in the traditional system. It gets down to 5 is where

the starting point is on the Medicare+Choice side, and then all

those things are backed out—GME, all of the issues that we’ve

talked about come into effect, then you add the risk adjuster, you

add the user fee, so in some counties you are down at the levels

we talked about, and it may actually be interesting for the commitVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00134 Fmt 6633 Sfmt 6602 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
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tee to note that in some counties now we are going to be down

below 1 percent in some areas because of the risk adjustor and the

user fee, etc.

So we have a real problem here, and I think that it is important

to look very clearly not just at the gross data but where it filters

out on a county-by-county basis and where we have the individuals

grouped in those counties.

Mr. BROWN. Before asking Dr. Moon to also reply to that, I think

this committee or this subcommittee was led to believe 2 percent

was the average, and now we are acknowledging it isn’t, it’s the absolute floor but the average is 5. So if you’re talking about averages

earlier, now you don’t seem too much——

Ms. IGNAGNI. I didn’t make the observation. I believe I was the

primary one to talk about numbers, because we seem to be one of

the few groups that has them. I never made the observation that

2 percent was the average. In fact, I remember stating in my oral

statement that 38 percent was in 2 percent, that 78 percent was

under 4 percent.

I apologize if you drew an erroneous conclusion from something

I said.

Mr. BROWN. Well, I think other people up here——

Ms. IGNAGNI. I didn’t mean to——

Mr. BROWN. Okay. I accept that. But I think other people up

here, when we made the contrast between 2 and that fee-for-service

was getting 5——

Ms. IGNAGNI. I think that was in response to Mr. Deutsch’s comment, and, indeed, in his counties many—we were having a discussion at that time, and perhaps that was when you perhaps drew

an erroneous conclusion from something I said. And if it was based

on something I said, I apologize.

We have endeavored to work very, very hard to provide fair and

accurate numbers, and I make you a personal promise that we

would be happy to talk about these numbers in whatever detail

you, your staff, or anyone else wants to see.

Mr. BILIRAKIS. And, of course, you’re all available for any questions that may come in writing to you.

Ms. IGNAGNI. Yes, sir.

Mr. BILIRAKIS. Did you want Dr. Moon——

Mr. BROWN. If Dr. Moon would respond.

Mr. BILIRAKIS. Very briefly respond so that we can finish up

here.

Ms. MOON. I would just like to reiterate that I think that it is

very important to look not only at the rates of growth in 1 year but

over a period of time. We had very high rates of growth for a long

time in which the base was built up, and I think that’s an important thing to think about, as well as the issue that there are a lot

of reasons why plans withdraw, and only one of them is the issue

of payment.

Mr. BROWN. And last, Mr. Chairman, the impression was still

left with this committee, advertently or inadvertently, from comments on both sides of the aisle, from Mr. Burr and Mr. Deutsch

to me, that managed care was getting squeezed while fee-for-service was going to get so much more money. That was really the imVerDate 20-MAR-2000 14:21 Mar 27, 2000 Jkt 010199 PO 00000 Frm 00135 Fmt 6633 Sfmt 6602 E:\HEARINGS\58504.TXT pfrm02 PsN: 58504
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pression left, unless I totally misread it, but from several people on

this panel today.

Ms. IGNAGNI. In fact, though, if you look at where the beneficiaries are living and you compare it to what is happening on the

fee-for-service side for next year, you make a very strong observation about the disadvantages, and that’s what the providers are

saying.

Given the rates of increase, in addition to all of the additional

administrative obligations—it’s not just health plans, but providers

observing that—I think they’re making honest and legitimate

points.

Mr. BROWN. Should we believe those same providers in their observations about the quality of managed care?

Ms. IGNAGNI. I think that providers actually have quite a lot to

offer this discussion about managed care, and I think that quite a

lot also is talked about in terms of quality that are quite appropriate by way of denials, and we just have to separate the two.

I’d be delighted to come back and talk about that.

Mr. BILIRAKIS. Again, we need to be objective and open-minded.

Talking about the 2 percent, I wrote a couple letters to a couple

of the plans that were dropping people in my Congressional District, and I received a response from one today. It says, ‘‘As you are

aware, since the passage of the Balanced Budget Act 1997, our reimbursement has increased at an approximate rate of only 2 percent per year.’’ And then, in parenthesis, ‘‘less the user fee, the cost

of regulatory compliance, and beginning in 2000 risk adjustment.

At the same time it has seen combined pharmacy, hospital, and

physician cost trends increase in the range of 5 to 6 percent,’’ etc.,

etc. So we are getting that sort of thing, and I don’t know whether

that 2 percent is accurate, but that’s basically what we’re hearing.

I think Mr. Brown’s point is well taken in terms of perception.

Listen, it has been a heck of a hearing. Thanks so very much for

your contribution. You’ve helped an awful lot.

The hearing is adjourned.

[Whereupon, at 2:48 p.m., the subcommittee was adjourned, to

reconvene at the call of the Chair.]

[Additional material submitted for the record follows:]

HUMANA INC.

LOUISVILLE, KY

August 2, 1999

The Hon. MICHAEL BILIRAKIS

Chairman, Health & Environment Subcommittee

House Commerce Committee

2369 Rayburn House Office Building

Washington, D.C. 20515

DEAR CONGRESSMAN BILIRAKIS: Thank you for the opportunity to share the process Humana used in reaching our decision to reduce our Medicare+Choice service

areas for the year 2000.

First, let me assure you that we did not take this process or decision lightly. As

one of the largest and oldest Medicare+Choice plans in the country, we are strongly

committed to the program and, more importantly, to Medicare beneficiaries. Because

of this commitment, our bias throughout our evaluation process was to try to find

a way to remain in a market if at all possible.

With that background, let me describe the process we used to analyze our opportunities in the 89 counties in which we currently offer a Medicare+Choice plan. We

began by developing a profile of each county. That profile included:

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• Current and projected HCFA reimbursement. We factored in both HCFA’s published payment increases for 2000 and projected risk adjustment reductions

based on the limited data HCFA has released to date relative to the payment

methodology they will be employing starting in 2000.

• Provider dynamics in each market. We assessed providers’ level to provide high

quality care while managing costs within the parameters of the available funding.

• Current and projected costs of providing M+C benefit plans in light of medical cost

trend. We track medical costs monthly by county. We then projected our costs

going forward using current and projected future medical cost trends, including

medical inflation and increased utilization of services.

• Competitive dynamics in each county. We assessed the relative strengths and

management capabilities of our provider networks; and the likelihood that our

competitors would similarly respond in this high, Medicare cost and artificially

low reimbursement environment.

As you are aware, since the passage of the Balanced Budget Act in 1997, our reimbursement has increased at an approximate rate of only 2% per year (less the user

fee, the cost of regulatory compliance and beginning in 2000, risk adjustment). At

the same time, we have seen combined pharmacy, hospital, and physician cost

trends increase in the range of 5%-6%. Using this data, we evaluated certain options:

1) offering the same level of benefits at the same or increased out-of-pocket beneficiary costs (premium and copayments); 2) reducing benefits and offering the plan

at the same or increased out-of-pocket costs; 3) reducing benefits and increasing outof-pocket costs; and 4) non-renewing the plan or exiting the county. We then overlaid these changes on our ability to retain current members and attract new members. The findings of this analysis led us to regretfully discontinue offering

Medicare+Choice plans in 31 of the 89 counties we serve today.

Non-renewing our Medicare+Choice contracts in 31 counties was but one of the

changes we made in our Medicare+Choice program for the year 2000. We also filed

proposed benefit, premium and out-of-pocket cost changes in most of the remaining

58 counties. On average, beneficiaries will see benefit reductions worth $6.86 per

member per month and a premium increase of $13.98. On average, these changes

may not appear to be severe, but at an individual plan level, they will have impact.

Below is an illustration of the impact of the growing reimbursement gap:

• Currently, we offer a total of 25 plans in 20 markets or 89 counties.

• 18 plans have a zero member premium and pharmacy, preventive care, and

ancillary benefits. Currently 89.3% of our membership are enrolled in these

ancillary plans.

• 7 plans have a member premium ranging from a low of $10 per member per

month to a high of $75 and, while these plans generally have an enhanced

pharmacy benefit, only 10.7% of our membership are currently enrolled in

these plans.

• In 2000, we will offer 24 total plans in 15 markets or 58 counties.

• 3 plans, as filed, have a zero member premium and essentially the same benefits as in 1999. These 3 plans are projected to only cover 32.9% of our expected year 2000 membership.

• 4 plans, as filed, have a zero member premium, but significant benefit reductions ranging from a low of $8.39 per member per month to a high of $39.26.

These 4 plans are projected to only cover 12.7% of our expected year 2000

membership.

• 17 plans, as filed, have both a member premium and moderate to significant

benefit reductions. The premiums, as filed, range from a low of $10 to a high

of $130 per member per month. The benefit reductions, as filed, will range

from a low of $2.57 to a high of $46.78. These 17 plans are projected to cover

54.4% of our expected year 2000 membership.

It is important to note that despite these major changes for 2000, a number of

the 58 counties remaining in our service area will produce breakeven results at best,

provided we meet our expectations on enrollment and maintain effective provider

contracts.

Annually, we evaluate each of our plans. Future cost and reimbursement trends

and/or any new coverage, benefit or access mandates enacted by Congress or the

states or unnecessary and costly government regulatory burdens only increase the

likelihood of similar action next year.

Given our long commitment to the Medicare program, we certainly would prefer

to avoid future exits and are trying to work with Congress and the Administration

to find a mutually satisfactory solution to the current situation. I trust that the

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above information meets your needs. If I can be of further assistance, please do not

hesitate to contact me.

Respectfully yours,

HEIDI MARGULIS

Vice President, Government Affairs

RESPONSES FOR THE RECORD OF ROBERT A. BERENSON, DIRECTOR, CENTER FOR

HEALTH PLANS AND PROVIDERS, HEALTH CARE FINANCING ADMINISTRATION

QUESTIONS OF HON. TOM BLILEY

Question 1. Do physicians have to do the same kind of quality reporting under

Medicare fee-for-service that they have to report to the plans to comply with

QISMC? Is it possible this is another disincentive for them to participate in

Medicare+Choice?

Answer 1. Our goal is to require physicians to have quality reporting in Medicare

fee-for-service similar to what is being done for Medicare+Choice. We are exploring

potential methods for requiring data regarding specific performance levels from feefor-service providers. For example, We are currently requiring Medicare home

health agencies and nursing homes to collect and submit uniform performance

measurement data. We collect data on hospital performance and are considering requiring hospitals to collect and submit such data as part of the new conditions of

participation. We are also writing performance-based contracts with our Peer Review Organizations to improve Statewide performance in fee-for-service and managed care. Under all of the revised conditions of participation that are now in various stages of development for various fee-for-service provider groups (hospitals,

home health agencies, dialysis facilities, hospices), we will require performance improvement activities resulting in measurable improvement. With most of these provider groups, either the draft conditions or other arrangements require the providers to participate in national efforts similar to those required in QISMC.

Question 2. Doesn’t the risk adjuster score as healthy someone with a chronic disease who may be getting a lot of outpatient care but who hasn’t been hospitalized

recently? For example, a stage 4 (metastatic) breast cancer patient who has gone

through two rounds of chemotherapy and a round of radiation therapy but who

hasn’t been hospitalized in 5 years would be very expensive, but the plan would get

much less money for that person than it would have if the person had stayed two

nights in a hospital.

Answer 2. We assume that plans will do what is in the beneficiaries’ best interest

and not manipulate care simply to ‘‘game the system.’’ Nevertheless, patients with

chronic conditions, such as metastatic cancer treated primarily on an outpatient

basis, are still hospitalized at a higher rate than those who are not chronically ill.

Plans continue to have incentives to manage care on an outpatient basis because

of the high direct costs associated with hospitalization and the fact that the additional risk adjusted payment will not be made until the following year, at which

time the beneficiary might not still be in the plan. In addition, the PIP-DCG model

does not, as alleged, reward plans for increased hospital days. Changing medical

management practices to include hospitalizations would be a financial loser for

plans. We are committed to moving as soon as possible to a comprehensive risk adjuster that fully accounts for patients with chronic conditions, rather than the PIPDCG model which only partly accounts for the costs associated with certain chronic

conditions. In the meantime, we are working with plans to make adjustments to the

PIP-DCG model for conditions that are specifically amenable to sophisticated disease management approaches, such as congestive heart failure.

QUESTIONS OF HON. MICHAEL BILIRAKIS

Question 1. I am concerned not only with the budget implications of the risk adjustment mechanism, but also with the methodology involved. There are several programs which serve the frail elderly population. The purpose of these programs is

to keep these at-risk individuals out of the hospital. How are these programs treated

and effected by the proposed risk adjustor?

Answer 1. We share concerns about how these types of programs, which have a

special focus on keeping the frail elderly out of hospitals, will fare under our initial

risk adjustment system based on hospitalization diagnoses.

We therefore will not apply the risk adjustment method in determining their payments in 2000. We also are working with these organizations to get the encounter

data we need to determine how we should risk adjust their payments. For example,

some kind of special frailty adjuster may be in order.

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Question 2. It has been estimated that the risk adjustor proposed by HCFA will

save roughly $11.2 billion. Can you explain, in detail, where these savings would

come from and where the savings would go (e.g., U.S. Treasury, Medicare Trust

Fund, etc.)?

Answer 2. The new risk adjustment methodology more accurately determines payments for managed care enrollees than the current methodology, which is based on

demographic factors only. The new risk adjustment methodology considers health

status as well as demographic factors in determining payments. Payments will be

higher for sicker than average enrollees and lower for healthier than average enrollees. Many studies have shown that managed care enrollees are healthier than average. Therefore, on average, payments to managed care organizations will be lower

under the new methodology than the current demographic only model. Since all benefit payments for Medicare enrollees are made from the Medicare trust funds, any

savings due to making more accurate payments would be savings to the trust funds.

Question 3. It is my understanding that many seniors participate in the

Medicare+Choice program to obtain the prescription drug benefits available through

Medicare managed care plans. However, HCFA’s methodologies generally assume

that Medicare+Choice participants are healthier than individuals in traditional, feefor-service Medicare. Do you have any information comparing the prescription drug

utilization rates for Medicare+Choice participants versus those for beneficiaries who

do not participate in the program?

Answer 3. We do not have sufficient information to do such a comparison. Because

prescription drugs are generally not covered under Medicare, we would not have utilization information for Medicare fee-for-service beneficiaries. For Medicare+Choice

enrollees, we do not collect information on drug utilization.

QUESTIONS OF HON. SHERROD BROWN

Keeping Up with the Private Sector

Question 1. During the hearing, I asked whether the government fee-for-service

program is able to keep up with private sector health care plans. Dr. Berenson, you

indicated that risk adjustment helps the fee-for-service program keep pace with private managed care organizations, but you added that there are several other things

that we need to do. Would you please elaborate on those other steps?

Answer 1. There are a number of steps proposed in the President’s Medicare reform proposal to make Medicare a more ‘‘prudent purchaser.’’ Historically, traditional Medicare generally (except in the context of demonstrations) has been barred

from engaging in competitive bidding and other ‘‘prudent purchasing’’ practices that

the private sector has used to improve patient care quality and costs.

In the past decade, private purchasers of health care have developed effective

techniques that target both beneficiaries with special health care needs (recognizing

that they account for a large share of costs and could benefit from care management) and high-quality, efficient providers (to provide an incentive to improve care

and reduce costs). Such practices include: reducing beneficiary cost sharing in return for using high quality/cost-effective providers; improving and coordinating care

for beneficiaries through management of specific diseases and/or all of beneficiaries’

care; and purchasing through competition, selective contracting, and negotiated payment rates.

Under the President’s plan, traditional Medicare would be able to establish preferred provider arrangements, with special rates and discounted beneficiary copayments for the highest quality and most efficient health care providers. We have had

some experience with these types of purchasing techniques including the ‘‘Centers

of Excellence’’ demonstration project for coronary artery bypass graft surgery in

which we recognize exceptional quality providers while at the same time reducing

costs. The President’s plan would allow Medicare to make a single payment for certain procedures or conditions, provide incentives for qualified integrated delivery arrangements, and develop innovative pricing arrangements, for example, through

competition, to promote quality and savings, as is commonly done in the private sector. In addition, similar to successful private sector efforts, fee-for-service Medicare

should be able to utilize primary care case managers and disease management

strategies to improve the care for Medicare beneficiaries with multiple chronic

health conditions and complex health care needs to help make sure they get the care

they need while avoiding unnecessary services.

Overpayments to Medicare+Choice Plans

Question 2. In the Balanced Budget Act, we made a number of changes to the way

health plans are compensated in an attempt to correct overpayments to

Medicare+Choice plans. However, a June 1999 report from the General Accounting

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Office (GAO) found that even with those changes, we still may not completely eliminate overpayments to health plans. Would you please comment on this study?

Answer 2. The GAO was asked to assess whether BBA provisions will eliminate

excess plan payments. The GAO report identified favorable selection, that is, enrollment of a healthier population of Medicare beneficiaries in managed care plans, as

the primary cause of excess plan payments. GAO therefore concluded that implementation of risk adjustment will be the primary mechanism for reducing the excess. We agree with GAO that favorable selection has been the primary cause of excess plan payments. We are proceeding with implementation of a risk adjustment

methodology for payments in 2000 as mandated by the Balanced Budget Act of 1997

(BBA).

However, GAO does not believe that excess payments will be completely eliminated without an adjustment of the 1997 base rates, which were overestimated by

4.2 percent. The BBA rate methodology does not allow for adjustments to overestimates in the previous years. Thus, this overstatement can only be corrected by legislation.

Question 3. Based on this GAO study, do you expect that Medicare+Choice plans

will continue to be overpaid in the future?

Answer 3. Once again, we agree with GAO that implementation of risk adjustment will correct for favorable selection, the primary cause of excess plan payments.

The 4.2 percent overstatement of the base rate cannot be corrected by HCFA administrative action. As a result, payments in FY 2004 will be about $3.0 billion higher

than they would otherwise have been.

Question 4. What is the magnitude of the overpayments that have been made to

Medicare+Choice plans in the past? Will these overpayments increase or decrease

in future years?

Answer 4. The most recent analysis we did, to gauge the impact of the risk adjustment system we will initially be using for Medicare+Choice payments, shows that

plans have on average been overpaid by about 7 percent. This will decrease steadily

as we phase in the risk adjustment system over the next five years.

Medicare+Choice Plan Payments for the Beneficiary Information Campaign

Question 5. In their written testimony, the American Association of Health Plans

(AAHP) expressed concern over the user fees that plans must submit for the Medicare beneficiary information campaign. AAHP noted that last year’s campaign did

not meet Congressional expectations because many Medicare beneficiaries did not

receive correct or clear information. Would you care to comment?

Answer 5. Last year, we were successful in establishing an education program infrastructure to serve beneficiaries and to provide them with specific information

about their health plan choices. We did a pilot test of the most beneficial means

of communication with our beneficiaries. Activities included:

• distribution of materials to help beneficiaries understand their health plan choices

in 5 pilot States (detailed handbook to pilot States and more general information to all other States.);

• establishment of a Medicare Choices Help Line to answer beneficiary questions

and provide health plan information upon request which was initially piloted

but expanded to all in 1999;

• development and implementation of the Internet web site (www.medicare.gov) to

provide plan comparison information; and

• expansion of community-based outreach and education efforts; e.g., expansion of

the State Health Insurance Assistance Programs to include choice counseling.

Additionally, we have developed a performance assessment system for all elements of the education program to use for continuous quality improvement. These

assessment activities identify what is working well and what needs to be improved

for each of the mechanisms for communicating information about Medicare+Choice.

We are committed to improving the education program based on assessment results.

In forming any new and complex program, issues will arise. We conducted a pilot

to proof our approaches before going national. In conducting the pilot, we did encounter circumstances that affected the accuracy of information provided to beneficiaries through the Medicare&You Handbook. The print production process for the

Handbook begins in June. All information included in the Handbook must be finalized by that time. When the 1999 Medicare&You handbooks were printed, the information was correct. Errors in the handbooks, limited to the plan comparison information, were due to plan service area changes, such as non-renewals and service

area reductions announced in October. To address this situation, the handbook for

2000 will contain general plan information, such as Medicare+Choice plan names,

telephone numbers, ranges of premiums for plans available and a note if prescription drugs are offered. The handbooks will refer beneficiaries to the toll-free 1-800-

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MEDICARE number and the www.medicare.gov web site for up-to-date and detailed

information about the plans available to them in their area.

Question 6. HCFA has $25 million in user fees left over from last year. Could you

please explain why you have extra money left over, and why you believe HCFA

needs additional appropriations this year?

Answer 6. The $25 million in user fees left over from FY 1998 are from the tollfree line. Our original response rate estimate of 20 percent, based on analysis of

comparable private sector endeavors, were too high. Based on current experience,

we adjusted our operating assumptions to a response rate of 1% during normal

workload months and up to 6% during peak months; e.g., during the fall when the

handbook is distributed. We anticipate that these volumes will grow incrementally

based on increased advertising and focus on the 2001 lock-in. A 10% rate for the

peak is assumed in FY 2000.

We estimate a total need of $140 million for FY 2000. After allowing for the $25

million carry-over, we have a net need of $115 million in user fees. Our costs include: increased assessment efforts to ensure that the program is meeting beneficiary needs; new initiatives targeted to educating vulnerable populations; increased counseling services to beneficiaries; implementation of a Knowledge Base/

Management system to enhance customer service; promotion and publicity enhancements; implementation of a long-term Internet strategy and enhancements; increased materials/publications development; and increased efforts around the Consumer Assessment of Health Plan Survey (CAHPS) to ensure that beneficiaries are

being provided quality and comparison information about plans.

Question 7. Are managed care plan user fees paying for education efforts not solely related to managed care? Why should plans pay for unrelated education efforts?

Answer 7. The Balanced Budget Act of 1997 (BBA) specifies educational activities

that we must conduct and that the funding source for these activities be a user fee

collected from health plans. Before passage of the BBA, the Administration had proposed a broader fee that would be paid by all plans (Medigap), not just

Medicare+Choice, to assist in financing all of our education efforts. However, what

was passed under the BBA was an assessment of the user fee on Medicare+Choice

plans only. Despite this, we have continued to supplement the user fee funding of

Medicare+Choice education efforts with our own funding to support educational activities related to original Medicare.

QUESTIONS OF HON. RALPH HALL

Medicare+Choice Plan Withdrawals

Question 1. An April 1999 study of last year’s plan withdrawals by the General

Accounting Office found that many factors, not just low payment rates, contribute

to a health plan’s decision to leave the Medicare market or reduce its service area.

Would you please comment on the results of this GAO study? Do you believe that

similar factors have contributed to plan withdrawals this year?

Answer 1. Our analysis concurs with the GAO’s finding that many factors contribute to plan business decisions regarding Medicare+Choice program participation.

Different plans in similar market situations are making different decisions based on

their own internal issues and corporate strategies. And, yes, similar factors did contribute to plan business decisions this year. We have conducted an analysis of plans

that this year are leaving or diminishing participation in the program and of plans

that are remaining, which is attached.

Question 2. Where did Medicare+Choice plans pull out of the market? Was it

mostly in areas with the lowest payment rates?

Answer 2. Medicare+Choice plan pullouts were not primarily in areas with the

lowest payment rates. Payment levels in counties affected by plan withdrawals

range from the base rate of $401 to a high of $772 in Plaquemines Parish, Louisiana. In all, 329 counties in 33 states were affected. As mentioned above, we have

conducted an analysis of plans that this year are leaving or diminishing participation in the program and of plans that are remaining, which is attached.

Question 3. In spite of plans complaining about low payment rates, I understand

that more managed care plans are lining up to participate in the Medicare program.

Is this correct?

Answer 3. Yes. Since January 1999, 22 new organizations received M+C contracts

and 20 current organizations expanded their service areas. As of August 31, there

are 13 new M+C applications and 9 Service Area Expansion applications pending.

Performance Standards

Question 4. I have heard it said that the performance standards that

Medicare+Choice plans must comply with are difficult and cumbersome. I have two

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questions for you about performance standards. First, aren’t many of these health

plans required to collect and report this data for other programs and other purchasers? Are the Medicare+Choice requirements really that much of a burden?

Answer 4. Yes, many, if not most, other programs and purchasers require similar

reporting of performance measures. We believe that the performance standards required under Medicare+Choice are both reasonable and appropriate. Implementing

this requirement is consistent with our responsibility to promote accountability on

the part of managed care organizations. The collection, evaluation and reporting of

performance measures are not new to managed care plans. Many Medicare + Choice

(M+C) organizations collect and report data which include the Health Employer

Data and Information Set (HEDIS), measures which are sponsored, supported and

maintained by the National Committee for Quality Assurance (NCQA). HEDIS consists of standardized performance measures designed to help ensure that the public

has the information it needs to reliably compare the performances of managed care

plans. They are predictive of outcomes, are well-defined and are also well established and adopted in the private sector. In addition, an analysis of HEDIS measures gives purchasers and consumers the ability to evaluate health plan quality

using important criteria, and to make plan decisions based upon demonstrated

value rather than cost alone. The Medicare+Choice requirements also incorporate

data currently being collected as part of voluntary accreditation efforts. Many managed care organizations have collected and reported standard measures as a requirement of accreditation.

We have been sensitive to concerns regarding the varying differences in health

plan resources available to collect quality performance data relative to access and

effectiveness of care. The quality assessment and performance improvement requirements established in the M+C regulation build upon a number of public-private efforts. We are working diligently to ensure that our requirements are consistent with

those of private sector accrediting bodies. And we are strongly committed to implementing appropriate methods of performance measurement in the original Medicare

program as well as in managed care.

Question 5. Second, it seems entirely appropriate that a program that has spent

billions of taxpayer dollars should be held to performance standards. Do you agree

that Medicare+Choice plans should be held accountable for their performance?

Answer 5. Yes, we certainly agree that Medicare+Choice organizations should be

held accountable for their performance in providing the full range of services contained in their benefit packages to their enrolled members as well as providing the

services in a manner that is in accord with acceptable clinical practice. Thus, in the

Medicare+Choice regulations and policy, we are strengthening our commitment to

being a value-based purchaser and requiring accountability from the health plans

with Medicare contracts through the implementation of minimum standards.

To that end, we will be requiring health plans to meet minimum performance levels that will be measured through the collection of data such as HEDIS measures.

We will be requesting input from all interested parties on the implementation of the

minimum standards. As previously mentioned, we are strongly committed to implementing appropriate methods of performance measurement in the original Medicare

program as well as in managed care.

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